YOUNG MONEY
formerly pfeg
YOUR
YOUR MONEY MATTERS MONEY MATTERS y-m.org.uk Your Money Matters: Acknowledgments Young Money would like to take this opportunity Published by Young Money to thank Martin Lewis OBE, Founder of (part of Young Enterprise) MoneySavingExpert.com, for his generous donation, Young Enterprise Head Office direction and passion that made this project possible. Yeoman House Sekforde St Young Money would also like to thank the teachers London and consultants who guided the development of EC1R 0HF Your Money Matters and the Department of Education for their help and guidance in the development of Young Enterprise is a registered charity. this textbook. Registered number 313697 In addition, special thanks to: © 2018 Young Money Contributing authors ISBN 978-1-9164672-1-7 John Chapman All rights reserved. This book or any portion Stewart Jones thereof may not be reproduced or used in any Emma Waller manner whatsoever without the express written Russell Winnard, Young Money permission of the Publisher. Liz Booth, Young Money
Printed in the United Kingdom by Geoff Neal Group. Other contributors British Library Cataloguing in Publication Data Robyn Vernon-Harcourt, Young Money A Catalogue record for this publication is available Eileen Gannon, Young Money from the British Library. Feyi Onamusi, Young Money Charlotte Churchill, Young Money Braden Clamp, Young Money
Design by Something Big Ltd. Printed by Geoff Neal Group Proofread by Melissa Stewart Quality Mark by Young Money ENSURE YOU’RE IN THE KNOWS, NOT IN THE KNOW NOTS.
Foreword by Martin Lewis aka the Money Saving Expert
It’s only money isn’t it? Well, no, actually. It’s far more important than that. I’ve spent 15 years campaigning on TV and online to get people to be better with their cash. Money isn’t just a financial issue, problems can infect every area of your life – your happiness, mental health, work, relationships and more. This isn’t intended to scare you, I just don’t intend to sugar coat it just because you’re still at school.
Of course, you likely already make money choices on a daily basis – such as picking your phone or buying a friend’s birthday present – and as you move into independence the decisions grow, whether you dream of getting a car, want to go to Uni, or getting your first job. Throughout all of these, the knowledge and attitudes you have about money will become even more important.
That’s what this textbook is about. It’s here to start you out on your journey towards financial literacy. While it won’t come close to teaching you all the answers you’ll need for life, it does cover many of the main ones. Yet even if all you picked up was to take money seriously, to read up and ask questions before big decisions, and gain the skills to do the numbers, it would leave me skipping like a little lamb (not a pleasant image I accept).
While some of your parents and guardians will be great with money – some won’t – and it’s important we level the playing field. That’s one reason I, and many others, campaigned for years to ensure we got financial education on the curriculum. Yet that alone isn’t enough. We live in one of the world’s most competitive economies, companies spend billions advertising, marketing and teaching their staff to sell, yet we don’t get any buyers training.
That needs to change. This textbook aims to make it easier for schools to ensure that every young person receives a high-quality financial education by the time they leave school.
I hope you like it.
Martin Lewis
Young Money is very grateful to Martin Lewis OBE for funding the development and delivery of this textbook into every English state secondary school. Statement from The Rt Hon Nick Gibb MP:
Economic and financial education are an important part of a broad and balanced curriculum, and provide the essential knowledge that young people need to manage their finances and succeed in the modern world. Both the Department for Education and HM Treasury support high-quality resources for schools to help deliver this, and I would like to commend Martin Lewis and Young Money for making this new textbook available.
Minister of State for School Standards, the Rt Hon Nick Gibb MP
Statement from Michael Mercieca, CEO of Young Money, which is part of the charity Young Enterprise:
It’s an increasingly complex world out there for young people, with a huge range of financial decisions that need to be taken from an early age, in the face of ever-increasing technological change in the financial landscape. This textbook aims to help you get to grips with these money choices, which have such an important impact on your future. We couldn’t have produced this textbook without Martin Lewis OBE, who funded its development and delivery, and we’re extremely grateful for his support. I very much hope that this textbook goes a long way to helping you prepare for your financial future.
Michael Mercieca, CEO of Young Money, which is part of the charity Young Enterprise YOUR MONEY MATTERS
About Young Money
Young Money (formerly pfeg), supports all educators in developing the financial capability of the young people they work with. We are a trusted and valued provider of knowledge, resources and training to anyone teaching children and young people how to manage money.
We offer schools free resources and support to make teaching financial education easy. We know that every school and college is unique and needs to find its’ own solution to meeting the needs of its’ learners.
We believe that trained teachers provide the most effective and sustainable route for financial education in schools as they know their pupils best and understand how to integrate financial education into lessons and meet the requirements of their school curriculum.
Please visit us at www.young-money.org.uk to get ideas, inspiration, advice and to access our full range of resources and services.
Contact Young Enterprise Head Office Yeoman House Sekforde St London EC1R 0HF
T. 020 7330 9470 E. [email protected] Follow us on twitter @YoungMoneyEdu
Young Enterprise is a registered charity. Registered number 313697 Incorporated in England as a Company Limited by Guarantee No. 712260 YOUR MONEY MATTERS
YOUR MONEY MATTERS CONTENTS
9 HOW TO USE THIS MOVING ON FROM 121 SECURITY & FRAUD TEXTBOOK SCHOOL – THE WORLD 122 What is fraud? 75 OF WORK 123 Identity theft 11 SAVING 76 Next steps: apprenticeship 125 Key terms 12 Savings 76 Next steps: employment 126 Fake emails 15 Interest 78 Next steps: university 127 Online fraud 20 Savings accounts 79 Student finance 131 How to protect yourself 24 Ways to save 81 Earnings 132 Online security 28 Money and mental health 82 Payslips 134 Help available 29 What have you learnt? 84 Tax and National Insurance 136 Money mules 30 Further your knowledge 87 Self-employed 137 What have you learnt? 88 Methods of payment 138 Further your knowledge MAKING THE MOST 89 Why do we pay Income Tax? 33 OF YOUR MONEY 91 Pensions 141 GLOSSARY 34 Spending 94 Help for people on low incomes 38 Ways to pay 95 What have you learnt? 40 Budgeting 96 Further your knowledge 43 Keeping track of your budget 45 Value for money 48 Know your rights 99 RISK & REWARD 49 What have you learnt? 100 Types of personal financial risk 50 Further your knowledge 102 Attitudes to risk 103 Assessing risk 53 BORROWING 104 Investments 54 Borrowing and debt 106 Gambling 56 Repayment, interest and APR 110 Protecting yourself 60 Making informed choices 112 Types of insurance 62 Borrowing products 115 Other forms of protection 70 Manageable and against financial risk unmanageable debt 117 What have you learnt? 71 What have you learnt? 118 Further your knowledge 72 Further your knowledge
8 YOUR MONEY MATTERS
HOW TO USE THIS TEXTBOOK
Welcome to Your Money Matters. This book will help you make informed choice about managing your money, now and in the future.
There are six chapters on topics that are relevant to you. Each starts with a question, which the information included in the chapter will help you answer.
In each chapter, you will find:
INFORMATION WHAT HAVE YOU LEARNT? The information icon highlights key and Each chapter reviews learning with a ‘What have you useful information on the chapter topic. learnt?’ section, which include summary activities and case studies for you to complete, drawing on the DID YOU KNOW? knowledge you have gained throughout the chapter. Look out for the these icons, which will give interesting facts on the subject area. FURTHER YOUR KNOWLEDGE At the end of each chapter, there is an additional section ACTIVITY which includes further and more detailed information The pencil icon indicates there is an about the subject area, and extension activities to stretch activity for you to complete to help build your learning. your knowledge and understanding of the information you have read.
DISCUSSION The discussions provide an opportunity for to you talk to your classmates about the topic areas and give your opinion on key information within the chapter.
CASE STUDY The case studies let you examine real-life situations in more detail and decide what you think the best course of action is.
QUESTIONS You will find questions at the end of each section. The questions are an opportunity for you to apply the knowledge you have gained through reading the information and check your understanding.
9 YOUR MONEY MATTERS YOUR MONEY MATTERS
10 SAVING
SAVING IS IT IMPORTANT FOR ME TO SAVE MY MONEY?
In this chapter you will explore the reasons that people save money, and how to compare the range of saving options available.
You’ll see how saving is an important way of reaching future financial goals, and how individual choice is important in making those decisions.
By the end of the chapter, you will know what your main options are for saving your money and be able to make comparisons between them. You’ll be aware of some of the main features and perks that can come with savings options, and how to take these into account in your decision making.
DID YOU KNOW?
There are over 300 banks and 45 building societies registered in the UK. All provide a wide range of savings options for customers.
11 SAVING SAVINGS SAVINGS
SAVING OR SAVINGS?
It is easy to confuse the terms saving and savings.
Saving is often thought of as the act of putting away money for future use. This might range from a few pence being kept in a money box at home to a larger amount being placed in a bank account.
Saving can also refer to reducing the amount you spend, maybe allowing you to put some of that money away for future use.
Savings refers to the amount or value of the money that is being put to one side. If you have put £50 into a bank account this is your savings. If you then arrange to put in a further £10 per month then that is the amount you are saving. In this example, at the end of 1 year you would have saved a further £120 (£10 x DELAYED 12 months) on top of the initial £50, giving you a total savings amount of £170 altogether. This is the amount GRATIFICATION that is said to have accrued. When you save money, it is likely that you will spend it Reasons to save: at some point in the future. That could be either in the next few days or weeks (short-term saving) or within the • For a very specific purpose or to help achieve a next year (medium-term saving). It may even be much particular goal further into the future (long-term saving) – for example, • To gather together wealth for future use when you are saving up for somewhere to live or even • To put money aside for unplanned events thinking about retirement. In some cases, the money • To keep your money safe. you save may be passed on to others through gifts, donations to charity or inheritance.
Saving for future spending is sometimes called “delayed gratification” – in other words, we postpone the sense of enjoyment we get from immediate DISCUSSION spending to sometime further into the future. But remember, the money can only be spent once, so the Think about the different reasons people might choices you make about how to spend your savings have for saving money. Come up with two should be made very carefully. examples for each of the reasons above. Saving can bring its own sense of satisfaction – if you’re saving on a regular basis and can see your savings increase as you move towards your target amount.
12 SAVING SAVINGS
WAYS TO SAVE
ACTIVITY The simplest way to save is to put some cash to one side at home. This is usually fine for small amounts but 1. Sam currently spends all of his £5 pocket money becomes increasingly risky as the amount of savings every week on a music streaming subscription. becomes larger. Cash in the home is at risk of being There is currently an offer to make a one-off stolen or lost, and it can be difficult to keep track of payment of £80 for a whole year of streaming. exactly how much you have in order to know if any is a) How many weeks will it take Sam to save up missing. That’s why many people choose to keep their the money for the one-off payment? money in a safer place such as a bank, building society b) How much would Sam save over the year? or credit union. c) Do you think it is worth the wait to save up for the one-off payment? d) What might the disadvantages be?
2. Jakob has saved up for a new game to play on his console. He can buy it online now for £40, plus £5 postage and packaging, or he can wait 3 months, save a bit more and buy the downloadable version, which will have added features and levels, for £55. He can only spend the money that he’s saved up once, so needs to decide what to do. a) Identify the benefits and implications of each option. b) In your opinion, should Jakob delay buying the game? What would you do? DID YOU KNOW? Banks, building societies and credit unions are all organisations that provide financial services, including the ability to save, but are structured differently. A bank is an organisation owned by its QUESTIONS shareholders. It aims to maximise profits for its shareholders through its financial activities. 1. What is the difference between A building society is an organisation that is owned ‘saving’ and ‘savings’? by its members, some of whom will be customers 2. Identify three benefits of someone who save money with or borrow money from the having savings. society. They often offer a range of financial services 3. What might be the consequences and are similar to banks. of not having savings? Credit unions are community focused, non-profit 4. Give an example of delayed making organisations that encourage saving and gratification. lend money to members. To use a credit union, you have to become a member.
13 SAVING SAVINGS
TYPES OF ACCOUNT
There are two main types of account which can be DID YOU KNOW? opened at a bank, building society or credit union: All UK-regulated current or savings accounts • Current accounts. These help you to manage and cash ISAs (Individual Savings Accounts) your day-to-day money, pay bills, receive incoming in banks, building societies and credit money and help keep your money secure. Most unions are covered by the Financial Services standard current accounts are free to use. Compensation Scheme (FSCS). Many banks and building societies offer current This means that if they fail you would accounts with extra incentives, for example: holiday get back up to £85,000 per person, or mobile phone insurance, cheaper rates on loans per financial institution. and mortgages, and money off holidays and flights. These have a monthly fee of between £10 and £20 and are called “packaged accounts”. However, you should only consider one of these current accounts if you know that the annual cost of the package is less than if you were to buy the incentives separately. There is also a switching service available that allows you to move your current account from one bank or building society to another. They may provide you with vouchers, cash and better interest rates as a reward to switch to them. Some current accounts pay interest on the money you have in them and may even pay more than a savings account (although this is often only up to a limit of around £3,000). • Savings accounts. These are specifically designed for you to save money in and are usually best for saving larger amounts. The amount you put in may grow as interest is added. Interest is an extra QUESTIONS payment given as a reward for keeping your money with that particular organisation. They may also be 1. Give three advantages of keeping money in a bank account rather than at home. referred to as deposit accounts. 2. What is the difference between a current We’ll look in more detail at the different types of account and a savings account? savings account later in this chapter. 3. How do you think someone might use a current account and a savings account together? 4. Some people have more than one savings account. Why might this be the case?
14 SAVING INTEREST INTEREST
A REWARD FOR SAVING ACTIVITY As well as being a safer option for storing savings, 1. Using the simple interest formula, calculate the people choose to save with a bank or building society interest if the £1,000 were kept in the savings because they offer interest on money saved with them. account at the same interest rate of 2% for: Interest is the reward you get for keeping your money with a bank or a building society. It is also the cost you a) 3 years b) 7 years c) 15 years pay when you borrow money through a loan or credit agreement – see the ‘Borrowing’ chapter. It is usually (HINT – use the formula but change T to the worked out as a percentage, known as the interest rate. different number of years the money is saved.) From this, you can work out how much interest is going 2. Can you see anything slightly unfair with the to be earned on top of the money you save. calculations you have made in Q1? There are two ways of working out interest – simple interest and compound interest. In reality, all banks will (HINT – think about the amount you use the compound method to work out the interest they are receiving interest on each year.) pay or charge you, but let’s look at the simple interest method first to see why this is: The interest earned on an initial amount of £1,000 (known as the Principal) deposited into a savings account with an interest rate of 2%, or 0.02 in decimal format (known as the Rate), for 1 year (known as the Time) can be worked out using the simple interest formula: Interest = P x R x T In this case, this would be, 1000 x 0.02 x 1. So, an interest rate of 2% paid on a principal of £1,000 would gain £20 interest over 1 year. This will only be accurate if no further money, on top of the original £1,000, is deposited or withdrawn. This method of calculating interest is known as the simple interest method. It suggests that the principal amount would earn £20 every year.
15 SAVING INTEREST
COMPOUND INTEREST
In reality, organisations use a different method of calculating interest known as compound interest. This recognises that at the end of year 1, your total savings would be £1,020 and that in year 2 you should have your interest calculated against this higher amount. This means that the interest gained in previous years will also earn interest – meaning you receive a higher return on top of your savings. Interest on interest on interest…
So, if the £1,000 is deposited for 3 So, over 3 years with a principal This method of calculating years and the 2% rate is compounded sum of £1,000 you would receive compound interest is really good it will work out as follows: £1.21 more if the interest was to use when there are only a small Year 1: £1,000 x 0.02 x 1 = calculated using the compound number of years to calculate but £20.00 interest. Total savings at the method compared to the simple imagine if you had savings of end of Year 1 = £1,020 interest method. Not a huge 10 years or more…it would take difference? Well, that’s true on you much longer to work out the Year 2: £1,020 x 0.02 x 1 smaller amounts saved over short answer. Therefore, another way of = £20.40 interest. Total savings at time periods but, for larger amounts calculating compound interest is the end of Year 2 = £1,040.40 over longer time periods, the using the multiplier, for example if Year 3: £1,040.40 x 0.02 x 1 interest gained will be much more £50,000 was saved over 15 years = 20.81 interest. Total savings at significant. at an interest rate of 2% the total the end of Year 3 = £1,061.21 value of savings would be:
Interest Multiplier Total Principal rate as a No. of years (always 1) decimal savings
£50,000 x 1.0215 = £67,293 So, the amount of interest earned over 15 years would be
Original Total Total amount savings interest invested
£67,293 - £50,000 = £17,297
If we had used the simple interest method, the total interest would have been: £50,000 x 0.02 x 15 = £15,000, so the total value of the savings would have been £65,000. In this scenario, using the compound method would mean you would receive £2,293 more interest. That’s £2,293 more, just because of the way the interest is calculated. This final amount will only be reached if no further money is deposited or withdrawn. In reality, more money may have been added to the amount being saved or some of it taken out to be spent. Therefore, the amount actually being saved will vary constantly; this will in turn affect the amount of interest being accrued.
16 SAVING INTEREST
DID YOU KNOW? ACTIVITY
The formula for compound interest, which you The chart below shows the average annual savings will use in GCSE Maths, is: interest rates in the UK from 1990 to 2017. r n Total accrued = P ( 1 + ) 100 1. Summarise what has happened to savings interest rates over this 27 year period.
2. If you had put £1,000 into a savings account in 1990, how much interest would you have earned ACTIVITY over the year? 3. If you had put £1,000 into a savings account in 1. Use the compound method to calculate the 2017, how much interest would you have earned interest paid on a principal of £150,000 over the year? saved in a savings account paying 3% interest over the following periods: 4. Look at your answers for Q2 and Q3, what does a) 5 years b) 12 years c) 20 years this tell us about interest rates?
2. What if the interest rate was 5%? Use the 5. Look at the trend over the 27 years, what would same information in Q1 to recalculate the you say is likely to happen to savings interest interest received. rates in the future?
3. Calculate Q1 and Q2 using the simple interest method and compare the difference in interest received to the compound method.
Annual average UK interest savings rates
I 3
3 3 3
17 SAVING INTEREST
DID YOU KNOW? ACTIVITY
Banks tend to calculate the interest on your 1. ZYX Bank offers a saver rate of 1.5% and savings on a daily basis using the compound a borrowing rate of 9.5% per year. Calculate method, although the period that they pay the profit the bank would make if an amount the interest to you can vary from one savings of £2,000 was saved and then lent out over account to another. 1 year.
2. Explain what would happen if the borrowing Take a look at the following table, which shows what interest rate was lower than the saving would happen if banks were to calculate the interest interest rate. payable on £5,000 at a rate of 3% for 5 years over different compounding periods.
SIMPLE COMPOUND INTEREST INTEREST Yearly Quarterly Monthly Daily DID YOU KNOW? £5,750 £5,796.37 £5,805.92 £5,808.08 £5,809.14 It is important to remember that interest on savings are a form of income and are subject to tax (except ISAs - we will look at these later on). DISCUSSION There are limits as to how much interest you can earn before it becomes taxed. These are set out Why do you think banks calculate interest on in the Personal Savings Allowance (PSA), but a daily basis? for most people they would have to earn over Why do you think different institutions pay £1,000 interest a year before paying any tax. interest out at different intervals?
WHY DO BANKS PAY INTEREST?
Banks pay interest as a way of attracting people to For example, ABC Bank pays savers an interest rate save with them. While they have your money, they are of 2% a year, but charges borrowers an interest rate able to make use of it, for example, it can be lent to of 10% a year. If a saver put £1,000 into their savings borrowers. When a bank lends money to borrowers account for a year ABC Bank would pay them it will do so at a higher interest rate than it pays to £20 interest. its savers. Over that same period, if ABC Bank loaned the This is why it is better to save than borrow, because in £1,000 to a borrower the bank would receive £100 effect you get paid to save whereas you have to pay in interest at the end of the year. to borrow. In total, ABC Bank have made £80 profit. This would If you have borrowed money from a bank, you should be £100 interest from the borrower minus £20 interest try to pay this off before you start saving. This is they have paid to the saver. This is how banks and because it costs you more to borrow than save. other financial institutions make some of their profits.
18 SAVING INTEREST
COMPARING INTEREST RATES AND THE ROLE OF QUESTIONS ANNUAL EQUIVALENT RATE (AER)? 1. Why do financial organisations offering similar savings products have different You might think it would be really easy to compare interest rates? two savings accounts by looking at the interest rates 2. Why is the Annual Equivalent Rate (AER) they offer. Well, it’s actually not always as easy as you used to work out overall interest on a might think. savings account? Some savings accounts have charges associated with 3. Explain the advantage of compound interest them, for example, when withdrawing cash at short compared to simple interest. notice. While some savings accounts offer additional 4. Which is better for a saver – an account which perks and bonuses, for example, a higher interest rate calculates interest daily, monthly or yearly? for the first year. 5. AER is one way to compare savings accounts, To make comparing the interest on savings account but what else should you consider when easier it is shown as an Annual Equivalent Rate (AER). choosing the right account for you? This takes into account the charges and the interest paid on the account and shows it as an overall percentage rate. This means that savers can easily compare savings accounts from different banks. The higher the AER the more interest they will receive on their savings. THE IMPACT OF INFLATION
Inflation is simply the general increase in the cost of goods and services from one year to the next. The DID YOU KNOW? government calculates this figure every month and publishes it as a percentage. The higher the inflation The interest rate you get on your savings is rate, the greater the increase in cost of everyday goods influenced by the Bank of England. They set a and services. base rate, which banks then use to help set the interest rate they offer on their savings accounts. For example, if the inflation rate was 2% then a weekly food shop that cost you £100 last year would be The Bank of England have an opportunity to expected to cost £102 this year. change this rate eight times per year, however, unless they have made an explicit promise not If the rate of inflation is higher than the interest rate on to do so, high street banks can vary their savings, it means that the cost of goods and services interest rates whenever they want. are increasing faster than the level of interest received. Therefore, the amount you can purchase with the savings will have reduced.
So, if you have savings, or if you’re looking for a new If you want to learn more about how savings savings account, make sure to keep an eye on how the can work for you then go to interest rate you will be receiving compares to the rate www.moneysavingexpert.com/savings of inflation.
19 SAVING SAVINGS ACCOUNTS
SAVINGS ACCOUNT FEATURES
While the AER gives a very good indication of the amount of interest you will receive on your savings, it’s not the only thing to look for in a savings account. There are different types of savings accounts with features that appeal to different people:
TYPE OF SAVINGS DEFINITION ACCOUNT FEATURES ACCOUNT Easy access This type of account allows you to withdraw • May offer a higher interest rate when first set up accounts money at any time without prior warning. • Interest rate tends to be lower than for other accounts Often these are “instant access” accounts, • May be restrictions on how many withdrawals you which allow you to withdraw any amount can make every year, so make sure you check the of money from an ATM straight away small print for free.
Notice account Advance warning usually has to be given if • Typically, 30, 60 or 90 days advance notice has to be you wish to withdraw money from this type given to withdraw money of account without being penalised. • Withdrawing money without giving notice could result in loss of interest • Generally have a better interest rate as the bank knows when you will be taking money out, and can plan accordingly
Regular saver A regular sum of money must be added to • The interest rate is usually higher account the account each month. • The number of withdrawals that can be made from the account may be limited • In all cases, there is a limit to how much you can save (usually around £250 per month) Fixed rate savings Your saved money is “locked away” • A one-off amount often must be deposited at the start (sometimes called for a specified period of time (known as • The term is usually between 1 and 5 years bonds) the term). • A fixed (and usually higher) interest rate is offered A bond is another word for a loan. – depending on how much money is deposited and This means that you are lending your how long the term is money to a bank or building society in • You may be able to withdraw money before the term return for interest. is up, but this will usually result in penalties, which are often higher than for a Notice account
Individual Savings This is a form of savings account where • The government set the limit of how much money you Account (ISA) you do not pay tax on the interest earned. can save in an ISA each tax year
These different forms of savings account are available from a wide range of banks and building societies, although the interest rate you receive will vary from one organisation to another. That means that while a higher rate of interest might be expected on a regular savings account, or fixed interest account, there could still be better rates to be found on easy access accounts. The golden rule is to always look around!
All of the above forms of savings account can be taken out as an ISA. This means that you are not taxed on the interest you receive up to a certain limit, which the government set each year. More details about ISAs can be found later on in the chapter.
20 SAVING SAVINGS ACCOUNTS
PREMIUM BONDS CHOOSING WHAT’S
Premium bonds are a form of savings account offered RIGHT FOR YOU by the government backed savings bank – National It’s very easy to just look at the interest rate when Savings and Investments (NS&I). You can buy premium choosing a savings account and pick the one with the bonds by paying between £100 and £50,000 to the highest rate, but that may not always be the best option NS&I. However, rather than receiving interest on the for you. Think about how often you’ll need access to amount you save, every £1 saved comes with a unique your savings, whether you can make regular payments bond number, which is entered into a monthly prize in or not, whether you need online or telephone draw for the chance to win a cash prize of between banking, and what the minimum opening requirements £25 and £1,000,000 tax free. So, if you saved £500 are. It may well be that the savings account that works you would have 500 bond numbers entered in the best for you is not always the one which offers the draw each month. highest interest.
DID YOU KNOW?
The odds of each £1 bond number winning a prize is 24,500 to 1.
21 SAVING SAVINGS ACCOUNTS
ACTIVITY
The following young people are all looking to set up a savings account. GENE 16 YEARS OLD
Gene gets a monthly allowance from his parents but spends all of this on his everyday costs. He also has a Saturday job in a sports store working for 6 hours at a rate of £4.50 per hour.
He is using the money he earns from his Saturday job to save up for a new bike which costs £750, but he can get a 10% staff discount on this.
So far, he has saved £300, but he keeps it in a box in his wardrobe and he’s not sure it’s safe, so he’s looking to open a bank account.
NANDITA 17 YEARS OLD
Nandita has a Saturday job, working in her aunt’s restaurant. She works for five hours and earns £4.25 per hour and averages an extra £10 each Saturday in tips, but by mid-week there’s never much left.
Nandita’s aunt wants her to open a bank account so that she can pay her wages directly into an account.
Nandita would love to go on holiday with her friends in 6 months’ time – her parents have volunteered to pay for the holiday, but she’ll still want to take spending money.
ADI 15 YEARS OLD
Adi manages his money carefully. He gets a weekly allowance of £12 and prefers to receive monetary gifts for birthdays, etc.
Although he’s not saving for anything specific, he knows that having some money put away for when he needs it is a good thing. He tends to think decisions about purchases through carefully, rather than making snap decisions (apart from downloading music).
He thinks he’ll probably go to university in a few years’ time, but until then he needs a bank account that will suit his current needs.
22 SAVING SAVINGS ACCOUNTS
Have a look at the four different savings account options below and choose the most appropriate account for each individual, giving at least two reasons for your decision.
PLUSH ACCOUNT JUNIOR PLUSH ACCOUNT PLUSH ONE ACCOUNT SUPER PLUSH ACCOUNT • 0.5% AER • 2% AER • 2.25% AER • 2.75 % AER • Open an account with • ATM card • £75 minimum to open • ATM card just £5 and receive a • £10 minimum to open account • £100 minimum to open free gift an account • 30 days’ notice to • Monthly deposit of £50 • ATM card (age 16+) • Age range: 14-18 years withdraw money without required loss of interest • Online and telephone • £25 gift card when you • No notice required for banking (age 16+) open an account • Minimum age to open withdrawals (up to a limit • Monthly paper account: 16 of £200) statements (with the • Internet banking only option to go paperless)
QUESTIONS
1. Why might someone choose to open an account where they have to give a period of notice before withdrawing savings? 2. What is the main benefit of an ISA? 3. Give an example of when you might use a fixed rate savings bond. 4. Come up with five things you should consider before choosing which savings account is right for you. Explain why you should consider each of these.
23 SAVING SAVING MONEY HOW TO GET THE MONEY TO SAVE
Putting your money into a savings account is a safe and largely risk-free way to save for the future. However, TOP TIPS getting the money to be able to save in the first place can be a challenge. There are four main ways in which Here are just a few ways you could you can get money to save: reduce your spending:
Earn it 1. Price check everything using comparison sites – find out which Increasing earnings, through extra work or an increase retailer is selling your favourite in pay, may enable you to save more of your income. computer games or latest gadget When you get an increase in earnings the extra income the cheapest. can very easily become part of your everyday spending, so a good trick is to put the extra bit of income into 2. Use discount vouchers or money-off your savings straight away – that way you don’t feel coupons – you can easily find these as if you’re missing out! online, in magazines and newspapers, or in shops. Be given it 3. Join online cashback sites – if you buy There are many occasions in life when you may be online, sign up to a cashback site and given money – for a birthday, as a gift, or even as every time you use that shop, you will an inheritance. get a certain percentage of money Sell things you own back for using the site. It is now easier than ever before to sell your 4. Follow your favourite shops on social belongings. For example, you might have games media – you will find out when they consoles, mobile phones or even clothing, which you are having sales or clearing old stock. no longer use. These may have value to others and make you some extra money in the process. 5. Declutter your bank account – cancel unused gym memberships, monthly Reduce your spending subscriptions and change your phone contract to a cheaper one if you can. Reviewing your spending and making more informed spending choices can have a serious impact on the amount of money you have left to save.
24 SAVING SAVING MONEY
DID YOU KNOW?
According to The Money Advice Service, 4 in 10 working age people have less than £100 saved in total.
ACTIVITY 6. Always ask yourself, “Do I really need it?” Think about some of the expensive items and events 7. Walk or cycle, rather than pay that you may have to save for in the future, then: for taxis or train and bus fares 1. List five items and/or events that you may have to – it’s better for your wallet save for as an adult. and your heart. 2. Estimate how much you think these may cost you. 8. Make a savings plan or use a savings app to help you save 3. Consider different ways you could save up for the short or long term. for these.
Once you start to pay your own 4. Consider what obstacles may stand in your way bills, take the time to do your of saving for these items/events. research to find the best 5. Decide how you may overcome these obstacles. money-saving deals. 6. Are you surprised about any of your answers? Can you think of any other ways How does this make you feel? to save? Do some research of your own and think about ways that suit you.
25 SAVING SAVING MONEY
CASE STUDY
Using your knowledge about saving, read the following scenarios and suggest how each person could save. Also consider the implications if they choose not to save.
1. Wasim has just started sixth form college and wants the latest designer trainers. His mum has told him that he already has a wardrobe full of trainers and that if he wants them, he must save the money himself.
2. Chloe is 18 and plans to go to university this year. She will be living independently, away from home. She currently has a part time job earning about £100 per week. She wants to save about £1,000 for emergency funds, just in case.
3. Ayomide has completed an apprenticeship in IT and starts his new job next month. To celebrate, he wants to go on holiday with his friends. He has a credit card and has decided to use this to pay for the trip and his spending money – he will worry about the bill when he gets back! He has some savings but if he uses these it will leave his bank account empty.
26 SAVING SAVING MONEY
ACTIVITY
Wasim decides to put together a savings plan so that he can get his new trainers.
• He needs £70
• It will take him 3 months
His savings plan is shown below:
DATE I PLAN TO SAVE (£) HOW WILL I SAVE THIS? I STILL NEED TO SAVE (£)
January £10 Pocket money I get from Nan £60
February £30 Birthday money £30
February £10 Pocket money I get from Nan £20
Chores around the house – washing March £20 car, cleaning room and taking dog for £0 a walk
Wasim reaches his goal of saving £70, but in the meantime he has turned 17 and now wants to start driving lessons instead of buying the trainers. Booking a set of lessons will cost him £140, so he needs to save more money on top of what he has already got. He anticipates that his income will be:
• £10 per month pocket money from his Nan.
• He usually gets the bus to college, but from April he intends to walk rather than get the bus, reducing his expenditure by £15 per month which he can keep.
• Sell an old pair of his trainers for £10 on a popular online selling site in May.
1. Update and complete Wasim’s savings plan.
2. In what month will Wasim be able to pay for his driving lessons?
3. What obstacles may stand in the way of his savings plan?
4. What other savings options does Wasim have?
27 SAVING MONEY AND MENTAL HEALTH MONEY AND MENTAL HEALTH
Saving is good for our mental health. If we know that we have some savings to cover an unexpected bill, for example, fixing the car or replacing a broken boiler, then it means that we do not have to worry about how we are going to afford to pay for it. Having savings may also mean that we do not need to borrow money and pay for credit. This can reduce stress and gives people more independence over their spending.
CASE STUDY
Abby and Paul both work and have just about enough money each month to pay the bills. However, when birthdays come around they often have to rely on their bank overdraft to pay for the gifts. They are always worrying about what will happen if the washing machine breaks down and not being able to pay for their children’s school trips. They have been asked to go on holiday with some family friends and have agreed to go, despite having no savings. Abby only really said yes because she doesn’t want her friends to think that she is skint. Paul is upset that Abby has agreed to this and this has put some strain on their relationship.
In groups, discuss the following questions:
1. What impact could this situation have on Abby and Paul’s mental health?
2. What effects has not saving had on Abby and Paul?
3. What savings advice would you give to Abby and Paul?
28 SAVING WHAT HAVE YOU LEARNT?
WHAT HAVE YOU LEARNT?
Using the knowledge you have gained from this chapter, can you help Sofia to manage her money better?
Sofia has never been very good at managing her money and previously got into debt by not being careful with her spending. However, she has been saving her £2 coins in a jar recently and she has managed to save a total of £136. She would like to save another £32 within the next month to reach her savings goal so that she can buy some new headphones.
1. Discuss the reasons why leaving the money 5. Sofia still owes £40 on her credit card. Should in a jar may not be the best place to store she pay this off or buy the headphones? her savings. Explain your answer.
2. Give Sofia some advice about the savings 6. Recommend how Sofia could manage her account options that are available to her. spending more carefully in future. Explain why you think these accounts are 7. If Sofia continues to get into debt, how may appropriate for Sofia. this affect her mental health? 3. Discuss other ways that Sofia could save the remaining £32.
4. Sofia really wants to get new headphones straight away and is desperate to buy some now. She knows that if she buys cheaper ones, they will not be as good as the ones that she wants. What should she do?
29 SAVING FURTHER YOUR KNOWLEDGE FURTHER YOUR KNOWLEDGE COMPOUNDING INTEREST OVER DIFFERENT PERIODS
Compound interest can be calculated yearly, quarterly (every three months), monthly, weekly or even daily. At the end of each time period the interest accrued is added to the account. In the next time period, interest is earned on the new total (original amount plus the interest added). So, the amount of interest earned increases from one period to the next. In theory, the more often the compounding then the better the return (all other factors being equal).
For example, if £5,000 is placed into a savings account for 10 years and the interest rate is 5% and compounded monthly, then the formula for calculating the value of the savings would be:
Interest Number of times the interest Multiplier Number Principal rate as a is compounded per year (always 1) of years decimal (12 months per year)
£5,000 (1.05 / 12) 12 (10)
£5,000 (1.00416)120 £5,000 (1.64701) = £8,235.05 (rounded) So the amount of interest earned over 10 years would be: £8,235.05 - £5,000 = £3,235.05
Work out how much interest will have accrued in the following savings accounts:
PRINCIPAL DEPOSITED INTEREST RATE COMPOUND PERIOD NUMBER OF YEARS
A £3,000 2.5% Quarterly 6
B £6,500 3.25% Weekly 4
C £8,325 2.76% Daily 7
By rearranging the formula, you can solve other variables too. For instance, you can find out what interest rate you need to seek to reach a particular savings goal. You can also see what difference it makes when various compounding periods are used.
30 SAVING FURTHER YOUR KNOWLEDGE
PERSONAL SAVINGS ALLOWANCE
As you have discovered, savings generate interest; In the following examples, calculate the amount this is classified as a form of income, and income of tax payable on savings interest after a year can be taxed. The Personal Savings Allowance (PSA) – if any: was introduced in April 2016 and allows savers to 1. Zane has already saved £2,000 in a bank account earn a certain amount of interest before tax has to paying 1.55% interest. He now regularly adds £50 be paid on it. per month to this savings account. He is a basic rate A basic rate taxpayer (20% tax on income) can earn tax payer. £1,000 interest on savings per tax year without paying 2. After a windfall, Camila has locked away total tax on it. savings of £60,000 earning 2.2% interest paid. Higher rate taxpayers (who move into the 40% tax She is a basic rate taxpayer. bracket) can earn £500 interest on their savings 3. Ali is a higher rate tax payer with three personal before being taxed. savings accounts. At the end of the year he has Additional rate taxpayers (whose income extends the following amounts in them: into the 45% tax bracket) get no allowance. • Account A: £35,000 earning annual interest It is estimated that only 5% of people will ever pay at 1.5% tax on the interest generated by their savings. • Account B: £10,000 earning annual interest For more information on income tax allowances, see the at 1.0% ‘Moving on from school – the world of work’ chapter. • Account C: £500 earning annual interest If the money saved is held in a joint account, then at 0.8% for purposes of the allowance the interest is regarded 4. Ava and Will are a married couple and have a joint as being equally split between the named account savings account. This has £38,000 in it, earning holders. The PSA is in addition to an ISA allowance. interest at a rate of 1.7% annually. They also have separate savings accounts with £25,000 (1.3% interest rate) and £17,000 (1.6% interest rate) in them respectively. They both have ISAs of £15,000 each (1.2% interest rate). Ava pays tax at the higher rate while Will is on the basic rate.
DISCUSSION
Is it fair that additional rate taxpayers get no PSA?
31 SAVING FURTHER YOUR KNOWLEDGE
ISAS
An ISA (Individual Savings Account) is a way of saving or investing money which means tax does not have to be paid on any gains (interest on savings, or income and increases in value of investments). The two main types of ISA are a Cash ISA and a Stocks and Shares ISA. The 2018/19 limit on the amount which can be saved per year is £20,000; this amount is reviewed annually by the government. Interest paid out on cash ISAs does not count towards a Personal Savings Allowance (PSA).
CASH ISA STOCKS AND SHARES ISA
Investing in a range of shares, bonds and Saving without paying tax on the interest. funds without paying tax on any gains.
Most suitable for investment schemes of at For short, medium and long term saving by Suitability least 5 years and only for those who accept most types of saver. they may not get back the full amount invested.
Some risk. The value of the money invested No risk. The amount of the money saved will may rise or fall in line with the stock market, Risk stay the same or possibly increase. so it’s possible to get back less than the amount invested.
Return Returns are limited by the stated interest rate. Unlimited returns possible (but see above).
Age limits Must be 16 years or over. Must be 18 years or over.
Although these are the main types of ISA there are others, for example: Junior ISA – a long term, tax free savings account for children under 18, which becomes a normal ISA when they turn 18; and Lifetime ISA – a long term, tax free savings account that is often used for first time property buyers or to build savings for when you retire. The UK government also contributes towards these savings.
ACTIVITY
Carry out some research and find out about the other types of ISAs. Then create a detailed fact sheet entitled “ISAs for Beginners”, which compares and contrasts the key aspects of different ISA products. Include a section which looks at how interest accrues over time and another that examines potential benefits and/or risks.
32 MAKING THE MOST OF YOUR MONEY
MAKING THE MOST OF YOUR MONEY HOW DO I MAKE SURE I GET THE MOST FROM MY MONEY?
We all make choices with money nearly every day – whether to spend it or not, what to spend it on, and searching for the best deals.
This chapter looks at some of the things that can influence these choices, how we can manage those choices more effectively and what our consumer rights are for the things we do spend money on.
DID YOU KNOW?
With a debit card you are spending your own money from your bank account; with a credit card you are spending someone else’s, and it must be repaid.
33 MAKING THE MOST OF YOUR MONEY SPENDING
SPENDING
NEEDS AND WANTS
We all spend money, but what we spend it on varies from one person to another. Spending can be split into needs and wants:
• Needs – These are the absolute necessities; the things you really cannot do without. Some of these are obvious, such as water, food or housing, DISCUSSION although you may still need to make choices about them, such as which brands to buy, which will impact Would you rate a smartphone as a need or on the price. a want? Discuss with others and share your views. Does your view change depending on: • Wants – These are the items, services or experiences • The age of the individual? you would like to buy if you have the money to do so. This is where personal choice and preferences • Where in the world they live? really come into focus. It is all a matter of the priority placed on each of these by each individual. • The amount of money they have?
34 MAKING THE MOST OF YOUR MONEY SPENDING
INFLUENCES ON SPENDING
It’s not always just our own needs and wants that It is really useful to be aware of what influences your determine how we spend our money. We can be own spending. If you know what the influencers are, influenced in a whole range of ways: you have a good chance of managing them! • Family – We often learn our money habits from Do your research our parents, older siblings and other family members. What they buy tends to influence what Making sure you are aware of the choices you have we buy, and how they use their money tends to affect is also really important when it comes to making the way we use it as well. spending decisions. Doing research can make a big • Peers – Most of us want to be accepted by our difference; it can help with: friends and so we buy what they buy to be a part • Identifying exactly what it is you need of the group. Social media has had a huge role to play in this in recent years. For example, following • The range of prices that exist for the same product – celebrities on social media platforms can influence the same product can be priced differently from one how we spend our money. We may like the products supplier or retailer to another and services that they endorse and want the same, • Finding out what others thought of the product and despite the cost. whether it was value for money – product reviews • Culture – Our cultural and religious background are often available online means we may develop a particular view of money • Whether there will be any newer versions of the and how it is spent. product coming soon – technology products, such as • Seasonal – National events such as Christmas, mobile phones, can change very quickly. Eid and Rosh Hashanah promote the idea of spending money on certain things at certain times of the year.
• Advertising – It is the job of any business to sell us their products. There is a huge advertising industry which helps to create wants in our minds. A good example of this is buying new clothes to follow fashion trends. We may not actually need another DISCUSSION pair of trainers but may buy them because we want them or feel we need them, and this is often due Which three influences do you think are the to advertising campaigns. most likely to affect individual decisions at the following ages? • Disposable income – This is the amount of money that we have left at the end of each month once all • 7 years old of the bills have been paid. For example, the more disposable income you have, the more likely you • 14 years old might be to buy things you don’t really need just • 25 years old because you have the money available to spend.
35 MAKING THE MOST OF YOUR MONEY SPENDING
ACTIVITY
Read the following social media profiles for people in different age brackets.
1. For each person identify what you think the 3. Who is likely to be influenced the most by social top three influences on their spending might be. media? How will this affect their spending? Give reasons for your answers. 4. Advertisers spend a lot of time and money 2. Who is likely to have the most and the least understanding what influences the spending of disposable income? How might this affect customers. In your opinion, do you believe this is their spending? money well spent? Give reasons for your answer.
JENAYA SIMON About me About me Gender: Female Gender: Male Age:16 Age: 37 Location: Yorkshire Location: Cumbria Hometown: Leeds Hometown: Keswick Employment: Student – just started A levels Employment: Computer analyst (self-employed)
Activities and Interests Activities and Interests Reading, football, cooking (especially baking), Fell walking, tropical fish, salsa dancing, family time Vlogging, my pet cat Oscar Music Music Ed Sheeran, Shakira, Luis Fonsi James Bay, Taylor Swift, Ariana Grande Books Books The Curious Incident of The Dog in The Night-Time, Harry Potter series, The Hunger Games, The Power, various biographies anything by John Green Movies Movies Guardians of the Galaxy, James Bond, The Fault in Our Stars, Wonder Woman, Star Wars The Greatest Showman Television Television Match of the Day, The Simpsons, The Great British The Apprentice, Mock the Week, Orange Is The Bake Off New Black
36 MAKING THE MOST OF YOUR MONEY SPENDING
DIGITAL MARKETING
Businesses are keen to understand the digital footprint of their existing and potential customers by collecting information on what they do online, for example, how they use search engines, social media platforms, shopping sites and other websites. This helps them to target different groups of people based on what they search for, buy and look at on CONNIE online. For example, if you search for concert tickets, you might get adverts for other events and venue About me information. This is called targeted digital marketing. Gender: Female Age: 64 Location: Gloucestershire Hometown: Bristol Employment: Retired QUESTIONS
Activities and Interests 1. Why do businesses spend vast sums Going to the theatre (especially musicals), watching of money on advertising? horse racing, travel, my grandchildren, gardening 2. Why is targeted digital marketing Music seen as particularly important to Michael Bublé, 1960s pop advertisers and the companies whose Books goods they promote? To Kill A Mockingbird, Stephen King books and crime fiction Movies The Best Exotic Marigold Hotel, Les Misérables, La La Land Television Downton Abbey, Suits, Poirot
37 MAKING THE MOST OF YOUR MONEY WAYS TO PAY
WAYS TO PAY DID YOU KNOW? The evolution of how we pay for goods and services has taken place over many centuries and new ways are The latest significant development with plastic still being developed today. The main ways we pay for cards is contactless payments, which speed up the things we buy are: any transaction. The following symbol identifies that there is a contactless payment option 1. Cash: Coins were first used in the 7th century BC – and is usually found on a card machine and notes first appeared in China a thousand years or reader. ago. Many people still use cash today as a quick and convenient way to pay for everyday items – though this is now being challenged by a number of electronic methods.
2. Cards: Since they first appeared in the 1950s there has been a rapid growth in the number of plastic DISCUSSION cards that can be used to access money. When people want cash nowadays they often use a card Contactless cards were first introduced in at an ATM or cash machine to make a withdrawal. 2007 when the transaction limit was £20 Using plastic is also a popular way of spending, per use. In 2015 this was raised to £30. though the two most common types of card can Research in 2017 showed that more than easily (but must not) be confused: 50% of retailers thought the limit should be Debit card – When you make a payment or raised to £50 and 20% thought it should be withdraw cash with a debit card, the money is taken raised to £100. straight out of your bank account electronically if What are your views on this? you have the money available to spend. You cannot borrow money on a debit card. Payments via a bank: If you have a bank account Credit card – Available to 18 year olds and older, there are a number of payment options open to you, these allow you to borrow money up to a certain as well as using your debit card. These are: limit. When you buy something with a credit card, the amount you spend is added to the total amount Electronic transfer – A way of moving money from borrowed. (There is much more information on your account to somebody else’s. credit cards in the ‘Borrowing’ chapter.) Standing order – For paying regular fixed amounts One of the benefits of using a credit card is that it gives from your bank account automatically. You are you greater protection if something goes wrong – for in control – you instruct your bank to pay the example, the business you bought the goods or services money to a particular person or company. It is your from goes bankrupt, or your order is not delivered. If responsibility to change the payment details (e.g. the this happens, then you would be entitled to a refund, date or amount) if they need to be changed. but only if the item or service you purchased cost between £100 and £30,000. This protection does not Direct debit – An instruction to your bank to release apply to debit cards. money from your account to pay bills and other amounts automatically. The billing company has control – they request the money from the bank
38 MAKING THE MOST OF YOUR MONEY WAYS TO PAY
directly, and they can change the amount requested. Some companies, such as gas and electricity, give a discount for paying by this method. DID YOU KNOW?
Cheque – Although used far less frequently today, There have been some interesting items used paper cheques are still available as a way to pay for as money in the past, including shells, cows, some things. stones, blankets and rice. These methods are widely accepted and are also In 2016, for the very first time, the number considered to be secure and safe. However, there are of electronic and card payments outstripped still some risks associated with them – for example, you payments made by cash. This was driven have to be careful not to make an error when writing by a steep rise in the use of contactless out a cheque or setting up a standing order, so always payment cards. check the details carefully. Plans to scrap cheques by October 2018 were themselves scrapped when it was shown that 4. Digital: The growth of technology has brought with it over £500m of transactions are still being made a number of advanced ways to pay. Among these are: using cheques each year! PayPal – an electronic payments system that allows you to make secure payments to an individual, or to purchase items online. Mobile phone apps – many UK banks have apps DISCUSSION that allow you to transfer money between people or businesses. What do you think the next developments in money could be? Contactless mobile – this allows you to make contactless payments using your phone. Is it possible to have a cashless society?
Digital wallets – these are apps that allow you to store all your credit, debit and customer loyalty card details on your phone, so you can choose which payment method you want to use at any time. QUESTIONS
Biometric payments – this allows you to make 1. What would have been the problem with payments using finger scanning technology or facial using goods like shells, cows or stones as recognition systems. a form of payment?
Digital ways to pay are convenient as they can usually 2. Explain the difference between a debit card be used at any time or place. However, the amount you and a credit card. can spend may be limited due to security concerns. 3. Explain the difference between a standing order and a direct debit. Whichever way you choose to pay for your products and services, always ensure that you use a secure 4. Which payment methods are the most and reliable method of payment and keep all of your secure? Explain your answer. cards and details safe. More information about this is 5. In your opinion, does the payment method covered in the ‘Security and fraud’ chapter. you use depends on the product or service that you are buying? Explain your answer.
39 MAKING THE MOST OF YOUR MONEY BUDGETING
THE BUDGETING BUDGETING PROCESS Budgeting is the process of managing your money. Budgeting does not have to be complicated. In its It can be used to manage the balance between simplest form, it is a list of what you need/want to your income (the money that comes to you through spend compared against a list of what income earnings, gifts, selling things you own, from your you have. parents, etc.) and your outgoings (your expenditure, savings, etc.). Look at Robyn’s weekly budget below. As you can see, she expects to earn £94.63 per week from her part A budget is the best way to keep your finances in time job and allowance and expects to spend check and to make sure you achieve what you want to £84.19 per week on various outgoings. achieve with your money. It ensures that: Robyn’s weekly budget • You have enough money to cover the necessities
• You are spending on what really matters to you INCOME EXPENDITURE
• You are putting money aside for the future £54.63 part time job £8 cinema
• You have considered other things you might want to £22.46 lunch out use your money for, such as giving to charity. £7.49 film download £40 allowance £38.99 jeans £7.25 bus trips
TOTAL £94.63 TOTAL £84.19
DID YOU KNOW?
The Chancellor of the Exchequer presents the national budget to government once a year, which details how the UK’s income will be spent.
40 MAKING THE MOST OF YOUR MONEY BUDGETING
DISCUSSION
In the example, Robyn’s spending (expenditure) is lower than her income. What could she do with the difference?
What if it was the other way around and her expenditure was greater than her income?
As people get older, especially when they start living on their own, their level of ‘committed’ spending (spending they need to make) can increase. Depending on their level of income they may then need to cut back on their ‘discretionary’ spending (spending they don’t need to make but might want to).
Examples of committed and discretionary spending
COMMITTED DISCRETIONARY SPENDING SPENDING
Mortgage or rent Digital TV/internet packages
Utilities Gym membership (e.g. gas, electricity, water)
Food Subscriptions
Car running costs Entertainment (e.g. cinema, DISCUSSION (e.g. petrol) theatre, going out to eat) What heading would you put your Insurance Days out phone under? Is this committed or (e.g. car, home, life) discretionary spending? TV licence Holidays
A budget is not something that always stays the same. As your financial situation changes, so can your budget. With a little more income, you might make different spending choices, but equally, you might need to cut back on spending if it does not match your income.
41 MAKING THE MOST OF YOUR MONEY BUDGETING
CASE STUDY
Awurabena recently got her first job after university Awurabena tries to go out with her work colleagues at on a graduate training scheme with an engineering least twice a week, costing on average £60 a week. company. To take up this opportunity, she had to As a reward for getting her new job she upgraded her move away from home. At university she shared a mobile and now pays £34 a month for a new model. house with five other people, but now she is working One thing Awurabena hadn’t anticipated were the Awurabena decided she would rather rent a flat of costs associated with her new job – travelling to work her own. (£78 a week), buying appropriate clothes (around Awurabena is paid £1,540 per month. This more £90 a month) and buying a coffee every morning than covers the £550 rent on her flat, but she was (£12.50 a week). a little more surprised at some of the other costs Awurabena is looking at buying a second hand car to associated with living on her own. Her gas and travel to work instead of using the train. To be able to electricity cost her around £65 a month, the water bill do this she has worked out she needs to save £150 a works out to be £27.50 a month, and she spends an month for a year. average of £55 on her weekly food shop. In addition to these costs, she subscribes to a music and movie • Use the information about Awurabena to create a app which, combined, cost her £19 a month, and she monthly budget for her. (TOP TIP – you could use also pays £23.87 a month to insure her belongings in Robyn’s budget as a template to help you.) the flat. • Consider whether Awurabena can begin to save As well as the costs associated with her flat, for her car and, if not, suggest ways she could amend her budget so that she could.
Managing a budget is a good way of making sure you don’t spend more than your income. A budget will also help to show you if there is room to save any money. By cutting down on some of your spending you may well DISCUSSION be able to save some money on a regular basis. Top tips for managing a budget: Think of two reasons why a family might have to spend more money in one month than they • Look more than just one month into the future. were planning to. The further ahead you are able to plan a budget for, the better. What changes might they make to their • Remember to update your budget to include costs expenditure if these situations happened? around key events such as birthdays, Christmas, Eid, Rosh Hashanah, etc.
• Use your bank statements to monitor your actual • Stick to the budget. It’s fairly easy to write a budget, spending. If you can do this in ‘real time’ using but the harder part is making sure you stick to it. mobile or online banking, rather than at the end of There will always be things that change, but adjust the month, even better. your budget accordingly, and keep to it.
42 MAKING THE MOST OF YOUR MONEY BUDGETING
QUESTIONS
1. Give two examples of income and two examples of expenditure. 2. What are two options you have if you find you have gone “over budget”? 3. Why does budgeting need to be more than a one-off activity?
KEEPING TRACK OF YOUR BUDGET
Setting a budget is one thing but sticking to it is just as important. There are various ways in which you can do this, but we will look at three easy ways to keep track of everyday income and expenditure:
1. Multiple money pots
One of the reasons that sticking to a budget can pots – these could be separate money boxes at be so difficult is that the majority of your income home, or even separate bank accounts. This means tends to all be held in just one place – that could be you can allocate you budget to the different money a moneybox at home, or a current account with a pots at the beginning of the month, and you’ll bank. All of your spending then has to come from always know how much you have left for different just one place too, and that can make it difficult to types of spending. see exactly how much you are spending on certain The trick to using this method is to get the amount types of things, e.g. going out, clothes, food etc. of money right for each ‘pot’ and then that The money pot method of budgeting suggests that tells you how much you have left to spend you separate your income into different spending on those things.
2. Manage a cash book
A cash book is simply a way of recording money that DISCUSSION is received or spent. By doing this every time there is a transaction the balance of money available is kept If your income for a month was £130, how would up to date. Although it’s called a cash book you can you split this across the following spending pots use this method to record any form of transaction, • Going out • Food such as direct debits and electronic payments. • Clothes • Travel There are some simple steps to maintaining a cashbook:
Firstly, you need to set up your template, which always includes the following headings (this can be on paper or electronically using Excel):
DATE DESCRIPTION INCOME EXPENDITURE BALANCE
Next, you’ll need to work out your ‘opening balance’. This is how much money you have at the point you are starting the cash book (if it’s nothing, that’s fine – your opening balance will be £0.00).
43 MAKING THE MOST OF YOUR MONEY BUDGETING
Finally, you need to record any income or expenditure that occurs, providing the date and a description of the transaction into the cash book. Every time you do this you will need to write in the new balance. Any income received will increase the balance, and any new expenditure will reduce the balance.
Example:
CHECK TO BANK DATE TYPE DESCRIPTION INCOME EXPENDITURE BALANCE STATEMENT 1.10.18 Opening balance 23.45 2.10.18 CR Allowance 40.00 63.45 ✓ 5.10.18 CQ New jeans 34.99 28.46 ✓ 8.10.18 CR Part time pay 76.98 105.44 ✓ 9.10.18 DC Train travel 16.53 88.91 ✓ 14.10.18 CM Cash 20.00 63.96 ✓ 18.10.18 DC Lunch out 15.76 48.20 ✓ 25.10.18 DC Cinema trip 12.99 35.21 29.10.18 DC New bag 23.45 11.76
DC – Debit card CM – Cash machine CR – Cash receipt CQ – Cheque
From the example above, you can see that maintaining the cash book ACTIVITY enables you to see exactly how much money you have left.
If you use a back account you can also use your bank statement to check Use the following information to that the cash book is correct. This is simply a case of ticking off every compete a cash book for Jayne: transaction on your bank statement against the equivalent record in your July is a big month for Jayne cash book. If there are items on the bank statement not in your cash – it’s her birthday, and she has book, these can then be added to the cash book. Reconciling the balance a music festival to go to. She in the bank statement to the balance on the cash book can then be done begins the month with £26.50 as follows: and receives £80 for her Imagine you had forgotten to add the last two entries on your cash birthday on the 2nd July. On book. The balance per your cash book would be £48.20, but your bank the 5th July she spends £35.67 statement would show £11.76. on clothing, ready for the festival. The following day she Looking at your bank statement you would see two items not yet included buys her train tickets in advance in your cash book: for £25.65. On the 14th July, her nan gives her £20 for Cinema trip £12.99 New bag £23.45 helping her with the gardening. By adding them in, the balance of your cash book would be £11.76 The first day of the festival is – the same as your bank statement. 20th July and Jayne spends £12.32 on food and drink. Whilst you can choose the period your cash book covers, they are usually The following day she spends displayed either weekly or monthly. As with the multiple money pots £13.45 on food and drink and method you can track your spending across different categories to make £15.56 on the third day. sure you are sticking within your budget.
44 MAKING THE MOST OF YOUR MONEY VALUE FOR MONEY
3. Using budgeting apps
There are now many apps which use the principal Where these apps can be extremely useful though of a cash book and combine this with innovations in is in automatically categorising the types of technology to provide some really powerful tools to transactions you make (such as on clothing, food or help you keep track of your budgeting. going out) and displaying the total amount spent in These apps can synchronise with your bank account a given period. They can also show the spending on (or more than one if that’s the case) and will each category as a percentage of your total income, automatically display the income and expenditure making it really clear how you are choosing to spend transactions and overall balance you have available your money, and possibly where you might want to (just like a cash book). make changes. VALUE FOR MONEY The word “budget” can also mean less expensive – as in the term “budget airline”. One way of staying within your means is to look at using cheaper alternatives to what you might usually buy. Something which is cheaper may have just as much value as a more expensive option, and the feeling that you are getting good value for money can be very positive. Price is not necessarily a guarantee of quality or value. This is why it is so important to do your own research, read articles and reviews, and compare prices, deals and offers.
ACTIVITY
Use the information in the table below to calculate the savings that can be made just by switching the type of brand you buy.
1. Work out the cost per week of each product 3. Work out the cost per year (52 weeks in for each of the three brand types. a year) of each product for each of the three brand types. 2. Work out the saving difference per week between: 4. Work out the saving difference per year between: a) Luxury and supermarket own brand a) Luxury and supermarket own brand b) Between luxury and value range b) Luxury and value range
NUMBER BOUGHT SUPERMARKET PRODUCT LUXURY BRAND VALUE RANGE PER WEEK OWN BRAND
Can of baked beans 4 £1.04 £0.65 £0.23
Cereal 1 £3.65 £2.21 £1.68
Crisps 6 £1.20 £0.99 £0.45
Batteries 2 £3.95 £2.89 £0.99
45 MAKING THE MOST OF YOUR MONEY VALUE FOR MONEY
SHOPPING AROUND
You can often buy the same product from different places at different prices, and in some cases very different prices. To ensure you are getting a good deal, it can pay to shop around. While you could walk up and down the High Street looking in each shop, the internet provides some simple solutions to comparing prices:
1. Using price comparison websites. These have 3. Information and review sites can be really been developed specifically to compare the prices of useful. They can help you understand the product goods from a range of suppliers and retailers. You you are interested in to make sure it meets your enter what you are looking for and they will provide needs. Review sites can be very helpful in seeing the you with a range of options. They’re a very useful opinions of others on the product you are interested tool, but it is worth remembering that these sites in. This could help you identify any issues with do not usually represent all the suppliers, and the quality or value for money. Remember, just because supplier with the best price might be online only, or a product is more expensive, it doesn’t mean it is not one you recognise. Also, be aware that different better quality. comparison websites will often show different prices 4. Renegotiate renewals and other contracts. for the same product, so make sure to compare Never renew a mobile phone contract at the same comparison websites too! price straightaway, as it is always worth checking 2. Explore online before hitting the High Street. on a comparison site to see if you can get a deal Comparing a few stores online before heading cheaper elsewhere. You can always contact your to the shops will save you from achy feet and it current provider to see if they can beat the quotes is a good way of comparing a range of shops to too. This is the same for TV, broadband, utilities and see which has the best price. You might also spot insurance – always make sure you are getting the exclusive online deals and offers too. best contract terms for your needs.
DID YOU KNOW?
Comparison websites first appeared in the mid-1990s. They are basically search engines that shoppers can use to filter and compare products based on price and other factors. They don’t usually directly sell products themselves; instead they earn money from marketing agreements with the companies they are working with.
46 MAKING THE MOST OF YOUR MONEY VALUE FOR MONEY
COMPARING PRICES IN THE SUPERMARKET
If you are going to the supermarket, look for the unit price of goods to work out the best deals. The unit price is the cost per litre, kilogram, etc., of something you are looking to buy. While one product might look more expensive than another, if you are getting more of it, it might be better value.
DID YOU KNOW?
There are price comparison apps you can use that allow you to scan a product’s barcode to find out if you can buy it cheaper elsewhere.
ACTIVITY What are the best deals here? DISCUSSION The chicken and the egg or cheep versus cheap! Consider some situations in which you might be tempted to pay a bit more for something • A 200g chicken for £4.50 rather than opt for the cheapest deal.
• A 500g chicken for £6.00
• A 1kg chicken for £10.00
• A box of 12 eggs for £3.80 QUESTIONS • A box of 9 eggs for £2.70 1. What are two different uses of the • A box of 6 eggs for £2.20 word “budget”? 2. Why should you try and use more When considering unit price, it is important to than one comparison site when think about whether you actually need it all or researching prices? not. There is no point in buying a box of 9 eggs 3. How does knowing the unit price of if you are only going to use 3 and the rest go something help a consumer? bad; this would mean the unit price per useful egg would be much higher.
47 MAKING THE MOST OF YOUR MONEY KNOW YOUR RIGHTS KNOW YOUR RIGHTS
We all like to get a good deal, and making sure you get value for money is important, but what happens if something goes wrong? What if the item you searched hard for and ordered online does not arrive, or you DID YOU KNOW? find the bargain top you picked up has a hole in it Many retailers will give longer returns when you get home? periods, and more enhanced terms than the Well, in nearly all cases you are protected by your law states. What is in the Consumer Rights Act consumer rights. These cover a whole range of 2015 is the bare minimum. situations where there could be problems with the goods and services you have bought. Very simply, when you buy any good or services they should: Last a reasonable length of time BUYING ON be Of satisfactory quality THE INTERNET be As described When you buy something on the internet you are be Fit for purpose still covered by the Consumer Rights Act. LOAF still applies, but there is additional protection through the Use your LOAF when buying goods and services! Consumer Contracts Regulation 2013.
If the good or service you buy does not fit with one or You have a right to cancel (even if you just change more of the LOAF definitions then you are protected by your mind): the Consumer Rights Act 2015. If you return the item within 30 days, you are entitled to a full refund. You • For goods, this is up to 14 days after you receive the can still return the item after this, but the supplier can goods (you then have 14 more days to return them) then offer a repair or replacement instead (and then a • For services, it is 14 days after the day you placed full or partial refund if this does not work). the order BEWARE! If you buy a product from a shop (not online) and make a mistake – for example, you don’t like it when you get home, or it doesn’t fit with your colour scheme – this is your fault and there is no obligation for the retailer to provide a refund or QUESTIONS exchange the product. 1. What are the four things it is your right to expect from a good or a service? 2. What is the difference in law between returning a faulty good within 30 days and after 30 days?
48 MAKING THE MOST OF YOUR MONEY WHAT HAVE YOU LEARNT?
WHAT HAVE YOU LEARNT?
Using the knowledge you have gained from this chapter, complete the activity and case study below:
ACTIVITY
Create a social media “top tips” list, noting the key points you think are important about making good money decisions. You could include information about:
• Best ways to pay • Benefits of budgeting • How to get good value for money.
CASE STUDY
Samira is 18 and wants to buy a brand-new laptop 1. Identify two influences on Samira’s spending. for college. She has seen the one she wants and it 2. Recommend how Samira could get the best value has been reviewed online by one of her favourite for money by shopping around. vloggers. It costs £550. 3. If the laptop breaks down, what are Samira’s However, her parents have suggested that she look consumer rights? at alternative models as they might offer everything she wants but at a cheaper price. 4. Considering all of the different ways to pay, decide how Samira should pay for her laptop. Explain your answer.
49 MAKING THE MOST OF YOUR MONEY FURTHER YOUR KNOWLEDGE
FURTHER YOUR KNOWLEDGE OVERSPEND ON BUDGET
Consider this monthly budget for a 20-year-old Rav is not able to increase his income, so must single male. Rav is currently spending more than he reduce his spending. Re-write his budget showing earns in income. Work out how much he needs to where you would reduce his expenditure. For each reduce his spending by to ‘break even’ and have his reduction in expenditure you should also give an income match his expenditure. explanation for why you made the change.
INCOME EXPENDITURE
Wages as a fitness Rent...... £520 instructor £1,200 Council tax...... £117 Fees as a personal trainer £590 Gas/electric...... £97 Water...... £32
Telephone/internet...... £26
TV license...... £13
Insurance...... £33
Credit card balance...... £217
Groceries and cleaning materials...... £95
Travel...... £62
Clothes...... £150
Laundry and dry cleaning...... £66
Sport activities (inc. football season ticket)...... £104
Toiletries and personal grooming...... £68
Mobile phone (inc. apps)...... £71
Nights out...... £275
Other treats (e.g. coffees, computer games)...... £170
Presents for other people...... £25
Sundries...... £35
Total income: Total expenditure:
50 MAKING THE MOST OF YOUR MONEY FURTHER YOUR KNOWLEDGE
VALUE FOR MONEY
In 2016, a survey conducted by the Money Advice Service tested 2,000 customers on their shopping “savviness”. Surprisingly, only 2% managed to get all the questions right. Now see how you do.
1. Of the following options for milk, which represents the best deal?
a) Six pints of milk for £1.80 b) Four pints of milk for £1.40 c) Two 6-pint cartons of milk on offer for £3.50 d) Two 4-pint cartons of milk on offer for £2 2. Of the following options for buying 500g of lemons, which represents the best deal?
a) One 500g pack of lemons costing £1.20 b) 500g of loose lemons at £2.50 per kilo c) Buy two get the third free deal on 200g packs of lemons costing 70p each d) Buy one get one half price deal on 250g packs of lemons costing 70p each 3. Of the following options for buying tomato ketchup, which represents the best deal?
a) One 460g bottle on offer at £1.50 b) One 910g bottle costing £2.49 c) Buy one get one half price deal on 700g bottles costing £2.29 each d) One 1.35kg bottle costing £3.50 4. Of the following options for buying eggs, which represents the best deal?
a) Six medium eggs for £1.10 b) 10 medium eggs on offer for £1.50 c) 15 medium eggs for £2.10 d) Two packs of six medium eggs on offer for £2 e) Buy one get one free offer on packs of 10 medium eggs priced at £2.20
Money Advice Service, 2016
51 MAKING THE MOST OF YOUR MONEY FURTHER YOUR KNOWLEDGE
CONSUMER RIGHTS
Read the following statements about your rights as a consumer and decide whether they are true (T) or false (F). If the statement is true add further explanatory notes; if it is false, rewrite the statement accurately. Use www.moneysavingexpert.com/shopping/consumer-rights-refunds-exchange for your research.
TF
You have bought a kettle in a store sale and it is not heating the water. The store tells you that you should complain to the manufacturer.
When buying a T-shirt in a store you have accidentally picked up the wrong size. Your neighbour, who works in the retail sector, tells you that the shop does not have to exchange it.
You have used your debit card to purchase a pair of trainers but when you get home you find the sole of one of them is coming unstuck. However, you have lost the receipt so that means you won’t be able to return them.
You have ordered a necklace online to wear at your 18th birthday party. The agreed delivery date is on the big day, but it actually arrives the day after. You are entitled to a full refund.
A book you have been after has turned up in an online auction advertised by a private seller. You buy the book but when it arrives you discover it is one you have already read before. However, you are sure you have the same right of return as buying it in a bookstore, so it can be sent back to the seller.
The holiday company you are dealing with goes bust and you lose all the hard-earned money you have paid out to it. A friend tells you that you should have used a credit card for this purchase.
52 BORROWING
BORROWING HOW DO I MAKE BORROWING CHOICES?
In this chapter you will explore options about borrowing money.
You will see how borrowing has increasingly become a part of the modern world, and that it requires very careful management.
You will look at the various ways there are to borrow money and what the advantages and disadvantages are of each method. You will also investigate how repayments and interest work.
Failure to repay and getting into debt can have serious consequences, so you will be looking at how to avoid these situations and what to do if debt does build up.
DID YOU KNOW? Debt is essentially borrowing against your future income. You are choosing to have money now that you will then repay out of your future income, but you will also pay an extra cost because you’re borrowing it.
53 BORROWING BORROWING AND DEBT BORROWING AND DEBT
Borrowing is receiving money from someone else with the agreement that you will pay it back at a later date. You might borrow informally from friends and family or DID YOU KNOW? take out a formal loan with a written agreement from a bank or building society. If interest charges are added By late 2017: to money that is borrowed, you will pay more back • People in the UK owed £1.566 trillion than the initial amount borrowed. – that’s £1,566,000,000 Loans and borrowing are now a part of modern life; • £1.36 trillion of that is outstanding they have become almost unavoidable in one form or mortgage debt another. You have to be at least 18 years old to borrow • That is an average debt of £30,253 per from banks but there are a lot of different forms of adult (including mortgage debt) – around borrowing to choose from, for example: 114% of average earnings • Organising a bank overdraft to help your • This debt is predicted to reach £2.296 trillion monthly budgeting by 2022 • Using hire purchase to buy a car • The number of debt problems dealt with by Citizens Advice every day was 4,563. • Taking out a personal loan to fund a one-off payment Source: The Money Charity, The Money Statistics January 2018 • Borrowing via a student loan to help fund yourself through higher education • Arranging a mortgage to buy a property SO, DEBT MUST • Using a credit card to pay when shopping online. BE BAD, RIGHT? You will find out a lot more about these different forms of borrowing later in the chapter. It’s a common misconception that all debt is “bad”. There are a number of circumstances where borrowing can be used to help us buy things which will have a positive impact on our lives and even improve our financial position over time. For example, borrowing money to buy a home. By taking out a mortgage you are buying your home and it becomes yours to own when the mortgage is paid off – unlike renting, where you may be making a similar payment but never own the property. Over time you would also hope that the value of the home increases, so that when you come to sell the property it would be worth more than you had initially borrowed. However you would need to bear in mind that property values may fall as well as rise.
54 BORROWING BORROWING AND DEBT
The reasons for taking on debt can be described as “good” or “bad”, depending on what you borrow the money for: • Good debt will provide an ongoing benefit to the borrower or will result in some kind of financial return • Bad debt does not provide ongoing benefit or a financial return to the borrower.
GOOD OR BAD – MAKE SURE IT’S MANAGEABLE
Whether the reason for the debt is deemed to be good or bad, the borrower must make sure that they can afford to pay it back. This usually means the borrower has budgeted for the repayment of the debt and has sufficient regular income to cover the cost. In this case, the debt would be called manageable debt. If a debt is taken on with no means to repay it, then this is called unmanageable debt. The difference between manageable and unmanageable debt is not always straightforward as ACTIVITY people’s situations can change. Imagine someone who took out a debt they could manage and afford then loses their job. Very quickly, the once manageable debt Look at the list below and identify those that would can become unmanageable. be classed as “good” debt and those classed as “bad” debt. You will explore more about manageable and unmanageable debt later in the chapter. Borrowing to:
• Go on an exotic holiday • Buy a car to travel to work each day QUESTIONS: • Buy a house to live in 1. Name three different forms of • Get a wardrobe full of new clothes borrowing. 2. What is meant by good and bad debt? • Fund higher education 3. How is good and bad debt different to • Get festival tickets manageable and unmanageable debt’?
55 BORROWING REPAYMENT, INTEREST AND APR REPAYMENT, INTEREST AND APR
REPAYING THE DEBT
When money is borrowed it has to be repaid. In fact, there are three things which have to be repaid: • The original sum borrowed (known as the Principal) • Interest which is added to the principal • Any charges or fees connected to the loan of the principal.
When you borrow money from a bank they will add interest onto the amount you have borrowed. This is the bank’s reward for lending you the money.
The formula for calculating simple interest is:
Interest Rate Time (how long it Principal (expressed as will take to repay the (amount borrowed) a decimal) borrowed money)
P x R x T
For example, if £1,000 is borrowed at an interest rate of 20% over 1 year, then the interest to be repaid would be: £1,000 x 0.2 x 1 = £200 The total repayment to the lender would be:
Amount borrowed Interest paid Total repayment
£1,000 + £200 = £1,200
DID YOU KNOW?
The official UK interest rate (often called the base rate) is reviewed and set eight times a year by the Bank of England. Many financial companies link individual interest rates for some of their products (e.g. mortgages) to rises and falls in the base rate.
56 BORROWING REPAYMENT, INTEREST AND APR
ACTIVITY
Using the repayment formula on the left, calculate the total amount that would need to be repaid if borrowing £3,000 for 1 year at the following rates:
1. 8% 2. 25.5% 3. 36.8% 4. 1,499% (payday lenders really do charge this much!)
COMPOUND INTEREST
Calculating the interest on borrowing over longer periods is slightly more complicated as banks will use a calculation known as compound interest. This recognises that at the end of year 1, the total amount you owe will be the principal plus the interest for that year. This means that the interest for year 2 is calculated on the total (principal plus interest) owed at the end of year 1.
So, if the £1,000 is borrowed for 3 years and the 20% rate is compounded it will work out as follows:
Year 1: 1,000 x 0.20 x 1 = £200 Total owed at the end of Year 1 = £1,200
Year 2: 1,200 x 0.20 x 1 = £240 Total owed at the end of Year 2 = £1,440
Year 3: 1,440.00 x 0.20 x 1 = £288 Total at the end of Year 3 = £1,728
So, if £1,000 were borrowed at an interest rate of 20% you would need to pay £1,728 to repay it after 3 years.
Imagine if the borrowing term was over many more years, the method above would take quite a long time to calculate and just like in the ‘Saving’ chapter, we can also use the multiplier method. For example, if £15,000 was borrowed over 7 years at an interest rate of 9%, the total amount repayable would be:
Interest Total Multiplier No. of Principal rate as a amount (always 1) years decimal repayable
£15,000 x 1.097 = £27,421
Be aware that the formulas we have looked at assume that there are no repayments being made until the very end of the borrowing period. In reality, this is not the case, and you usually make regular repayments against the borrowing. For example, you might repay £200 a month against your loan.
What effect do you think this will have on the interest you pay?
The formula for compound interest can be found in the ‘Saving’ chapter.
57 BORROWING REPAYMENT, INTEREST AND APR
ACTIVITY CASE STUDY Using the compound interest formula, calculate the total amount that would need to be repaid if Caz and Jenny have seen a flat they want to buy borrowing £3,000 at an interest rate of 20% over which is on the market for £150,000. They have the following periods: managed to save £20,000 for a deposit so need to take out a mortgage of £130,000, which they 1. 2 years 2. 4 years intend to repay over 25 years (300 months). 3. 7 years 4. 15 years They have shopped around and need to make a final decision between the two deals below: Now try... 5. 3 months 6. 6 months Option 1 – 2 year fixed rate mortgage For the first 2 years (24 months) they will repay at a fixed rate of 1.99%, which is £550.38 per INTEREST RATES month. After the 2 year period is up, they will go onto a variable rate for the remaining 23 years CAN CHANGE (276 months), which is currently 4.49% and £709.77 per month. When borrowing or saving it is possible the rate of interest might change. The impact this has on Option 2 – variable rate mortgage you depends on the type of borrowing you have, Throughout the whole 25 years (300 months) for example: they would repay the mortgage at a variable • Fixed-rate borrowing will guarantee the same interest rate. This is currently 4.14% and £696.28 per rate for either a specified time period of the loan or month although, being a variable rate, it can the full loan period. go up or down, making the monthly payments increase or decrease accordingly. • Variable-rate borrowing means that interest payments may change if the lender changes their rate. 1. By simply looking at the two options, which one would you choose and why?
2. If the interest rates stayed the same ACTIVITY throughout the lifetime of the mortgages, what would be the total amounts repayable 1. Using the definitions of fixed-rate and for each option? variable-rate borrowing, explain one advantage and disadvantage of each. 3. Based on the answers to question two, which option should Caz and Jenny choose? 2. Consider what the impact would be for people with variable-rate borrowing of: 4. Realistically, why might this not be the best option in the long run? • A rise in interest rates 5. Knowing this, does this affect your choice • A fall in interest rates of mortgage for Caz and Jenny? Explain 3. What if they had fixed rate borrowing? your answer.
58 BORROWING REPAYMENT, INTEREST AND APR
APR DID YOU KNOW! APR stands for Annual Percentage Rate and is shown as a percentage. Remember, at the start of this chapter, The interest banks pay on your savings is we said that the amount you repay is made up of the often lower than the rate they charge for amount you borrowed (or principal), the interest rate, borrowing. The difference between the rates and any charges or fees the lender makes. is the profit the bank makes – they are a business after all! The APR takes into account any fees and charges attached to the loan over 1 year, as well as the interest rate being charged, and shows it all as one percentage figure. The idea is that it makes it much easier to compare the costs of borrowing from different providers or using different forms of borrowing.
You should always see the APR figure stated on any advertising for borrowing products. However, what you will see in such adverts is a “typical” or “representative” APR – the actual rate you receive will take into account your personal circumstances. For example, if the bank considers lending to you to be slightly risky they might DID YOU KNOW! increase the interest rate, which also increases the APR. Islamic Sharia law expressly forbids the The interest rate you receive when you save money in charging of interest on loans, which is an account (taking into account any associated fees known as usury. It is believed that wealth and charges) is known as the Annual Equivalent Rate should be generated only through trade (AER). Make sure you don’t get these confused! and investment. There are specialist financial products available which are Sharia compliant.
DISCUSSION
Only 51% of successful applicants need to be given the representative APR for QUESTIONS: a lender to be allowed to advertise 1. What are the three elements of it. Many customers will most likely be repayment? offered a higher rate. 2. Explain the difference between APR Why do you think lenders advertise and AER. borrowing products with representative APR if not all customers will be given it? 3. How might changes in the UK base rate of interest affect borrowers?
59 BORROWING MAKING INFORMED CHOICES MAKING INFORMED CHOICES
Most people will have to borrow money at some point in their lives so understanding the choices you have, and the consequences of your actions, is essential.
CASE STUDY
Kofi wants to buy a second hand car to make his journey to work easier. He has found one he likes, costing £3,250. He has just about that amount in savings, but that is all of his savings, and he has been setting this aside for a deposit on a new flat. Having written a budget, Kofi has worked out he is able to put around £190 into savings each month. He has decided he has three options:
• Use existing savings • Save up for it • Borrow the money.
Consider each of the options for Kofi. What are the advantages and disadvantages of each?
Is there anything further you would like to know before making the final decision?
HOW BANKS CREDIT HISTORY MAKE DECISIONS One of the tools a bank uses to make their lending While we all have to make decisions about whether decisions is to look at your credit history – how much to borrow or not, which product meets our needs the money you have borrowed in the past, and how you best, and who offers the product at the best APR, the have managed it. This is in the form of something organisations who are lending the money also have called a credit report, which gives details of each to make their own decisions. The discussion below will borrowing product you have taken out, the repayments help you consider the decisions they have to make. you have made, whether any repayment dates have been missed, and the level of outstanding credit (debt) you have.
When you apply to borrow money, the lender will usually ask your permission to access your credit DISCUSSION report. These are provided to the lender by a credit reference agency. It is the credit reference agency that Imagine you are the bank. A customer comes collects all of the information on you and forms it into in looking to borrow £5,000 over 2 years. a report. They then provide these to the lender when a new borrowing application is made. The lender will use What do you want to know before making this information to decide whether they are able to lend your decision on whether to lend the to you, and if so, at what APR. customer the money or not?
60 BORROWING MAKING INFORMED CHOICES
Your credit history is really important to ensuring the best borrowing rates are offered to you. There are Definitions some key tips to making sure your credit history is maintained positively: Credit history – A record of loans you have taken out or credit card payments made or missed. This • Stick to repayment schedules. Missed payments will information is stored by credit reference agencies, show up on your credit report and may make a who supply details of your credit history to financial lender question your ability to repay on time. institutions when you take out further loans. • Don’t make too many borrowing applications at Credit reference agency – An agency that holds the same time. As well as recording your past and information on adults, including public records present borrowing, your credit history also records (e.g. electoral register entries) and credit history the number of applications you have made. If information. They make this information available a lender sees too many applications, they may to lenders when you apply for credit, who then use consider you too risky to lend to. the information to decide whether or not to offer you credit. • Build a credit history. This one may sound a little strange! Consider if you were the bank and Credit report – A detailed report of an individual’s someone asks to borrow quite a large amount of credit history, current credit arrangements, address money. You look at their credit history and find it’s history and details of anyone you are financially blank – nothing there. You would not know how linked with. When you apply for credit, the process the person will manage the borrowing as there is usually involves you giving your permission to nothing to base it on. the credit provider (e.g. banks, credit card providers, mobile phone companies) to check Some people actively build a credit history by taking your credit report. out borrowing products such as credit cards, using them occasionally and making sure they are repaid on Credit score – Lenders will use your credit history time and before any interest is charged. to calculate a credit score which reflects the level of risk in lending to you and the likelihood of As well as reviewing your credit history, lenders you paying credit back. Each lender scores you may also make their decision based on “affordability”. differently, and secretly, so if one lender has rejected By looking at your income and expenditure they will you, it doesn’t automatically mean others will. work out how much to lend to you based on what After a rejection it’s always important to check your they think you can pay back. If you have a good credit credit report for any errors before applying for history, but the lender doesn’t think you can afford the credit again. repayments, you might not be able to borrow as much as you wanted. QUESTIONS:
1. What are the decisions that lending organisations have to make before giving credit to a customer? 2. What tools do lenders use to help them make these decisions? 3. Name two ways that you can help build a positive credit history.
61 BORROWING BORROWING PRODUCTS BORROWING PRODUCTS
DID YOU KNOW?
Loans can be secured or unsecured. A secured loan requires something that gives the lender security in case you cannot pay the loan back. This is usually your home but could also be a guarantor. A guarantor is a person who agrees to be responsible for the loan if you cannot make the repayments. If you fail to repay the loan, the bank can get their money back by selling the security or requesting the guarantor pays. An unsecured loan does not involve security, but as the lender is taking a greater risk the APR tends to be higher.
Borrowing comes in many different forms. Here are some of the main ones:
BORROWING DEFINITION ADVANTAGES DISADVANTAGES METHOD Personal When money is borrowed for • You repay the • May take a long time to pay loan a non-specified purpose and same amount every off, depending on the amount generally paid back in monthly month, which helps borrowed and the APR. instalments. with budgeting.
Credit card A plastic card issued by a • Better consumer • Can encourage overspending if financial organisation with protection if the money available is seen as a certain limit agreed or something goes extra cash prearranged to allow you to wrong • Interest rates can increase. spend (borrow) money up to • May get a 0% or low that amount. interest card for an If you do not pay off the full introductory period. amount each month you will start paying interest on it. Store card Store cards are like credit cards • A shopper may be • Usually very expensive if the but are available from shops given the incentive balance is not repaid in full. rather than banks. They can of a discount on an only be used to buy things at opening purchase or particular shops. similar offer. Anything you spend on your store card is borrowed money and, as with credit cards, if you do not pay off the full amount each month you will start paying interest on it.
62 BORROWING BORROWING PRODUCTS
Overdraft An overdraft allows you to • Provides a • There may be fees to pay for borrow money through your short-term solution authorised overdrafts current account. • If arranged, can • If you go overdrawn without They can be requested from be paid off without asking the bank in advance the bank or are sometimes penalties or have an arranged overdraft automatically offered with • Only pay interest if and spend more than the current accounts. the overdraft is used. amount agreed, this is an Arranged overdrafts are set in unarranged overdraft advance and you can spend • In this case the bank will almost money up to the agreed certainly penalise you with overdraft amount. additional fees and charge you a higher interest rate on the money that you owe them.
Hire Tends to be for larger • Allows you to • Failure to repay means the purchase purchases, e.g. a car. purchase new things goods can be legally taken Repayments take place regularly that you could not away from you over a number of years, but you otherwise afford • Until paid for, you cannot sell do not legally own whatever you • Spreads the cost the goods on or alter them in have purchased until the final of an expensive any way. repayment has been made. item over a period of time. Student loan Specifically designed to fund • You only start to • Repayments will be considered (this will be you through higher education make repayments as part of affordability checks covered in and is then repaid regularly once you start for a mortgage greater detail after you start work. earning over a • The government is able to in the ‘Moving certain amount change the repayment threshold on from school • Low interest rates. and interest rate. – world of work’ chapter) Mortgage Used to purchase property or • Allows you to spread • Changes in interest rates can land and usually takes many the cost of property affect repayments years to repay. over a long period • Failure to make repayments of time. may affect your credit rating and continuing to do so may ultimately mean you lose your home.
Alternative credit: This covers catalogue shopping, doorstep money lenders, rent to own shops, pawnbrokers and payday loan companies, where the interest rates tend to be very high, so borrowing is very costly. These methods may be used by people with a poor credit history, meaning they are unable to borrow money at more competitive rates.
Remember, the higher the APR the more it will cost you to borrow, and the longer you borrow for at the same APR the more it will cost you.
63 BORROWING BORROWING PRODUCTS
CREDIT UNIONS
Credit unions are financial co-operatives, owned QUESTIONS: and controlled by their members, which offer a local 1. What is the difference between a alternative to banks and building societies. They are credit card and a store card? often run by members of a local community and the members who use their services can help make 2. Why do people sometimes turn to decisions about how the credit union is managed. alternative credit providers? 3. Explain the difference between They are not-for-profit organisations that offer similar an arranged overdraft and an financial products and services to banks or building unarranged overdraft. societies, for example, personal loans and savings 4. What are the differences of using a accounts. They have a social responsibility to support credit union rather than a bank? their local community and they try to ensure that costs are kept low so that borrowing rates are often lower than alternative credit providers. They can also allow for higher interest rates on savings. This can often mean that people who are unable to access high street banks and their products have financial support in their community, offering a good alternative to payday loans and doorstep lending. PERSONAL LOANS
A personal loan is an agreement between an individual (the borrower) and the financial organisation which is supplying the money (the lender).
Personal loans are usually taken out for a term of between 1 and 10 years and are usually unsecured (read the previous ‘Did you know’ to find out the difference between secured and unsecured borrowing).
You can apply for a personal loan through a bank, ACTIVITY building society, credit union or an online financial company. Each will advertise their interest as a “typical” or “representative” APR, but remember, this may not be Carry out research on credit unions and payday the rate you actually receive as it will be based on your lenders and write some bullet points about what you individual circumstances. have discovered. Consider including: On agreement, you will be provided with a repayment • What products they offer schedule. This shows all the repayments you will need • What their interest rates are to make over the term of the loan – these are usually monthly but can vary according to the Terms and • How they differ from banks Conditions of the loan. Once you are happy with the • The pros and cons of each agreement, you will be asked to sign a contract and the money will be transferred to your bank account.
64 BORROWING BORROWING PRODUCTS
At each repayment instalment you will be paying back a set sum made up of some of the principal (original DID YOU KNOW? loan amount) and some of the interest. This continues until the entire borrowed sum and the interest have Terms and Conditions (T&Cs) are often called been repaid. “the small print” and are the set of rules surrounding your loan. These should be If you have made some payments and then want to pay carefully checked to make sure you are getting off the remaining amount (balance) of the loan early, what you expected. In signing the contract, you a company will sometimes charge an early repayment are also agreeing to the T&Cs – although there charge (ERC), which may take the total to more than is a 14-day “cooling off” period before they you would have paid over the agreed amount of time. become legally binding. They do this because they will otherwise miss out on some of your interest repayments if you exit the deal before the end of the agreement.
CASE STUDY
Paige is a keen cyclist and wants to buy a new bike. She has a part time job and her credit score shows that she will be able to get a loan, but she needs to look at her borrowing options. She researches online and finds a loan for £1,000 that looks suitable, but she needs to decide how long to borrow the money for.
Her options are shown below:
TOTAL AMOUNT MONTHLY BORROWING INTEREST RATE INTEREST PAYABLE REPAYABLE REPAYMENT
1 year loan 16.9% APR £87.20 £1,087.20 £90.60 (12 months)
2 year loan 16.9% APR £171.92 £1,171.92 £48.83 (24 months)
3 year loan 16.9% APR £260.72 £1,260.72 £35.02 (36 months)
1. Which option should Paige choose? Why?
2. Think of three questions you would ask Paige before she takes out the loan.
3. What other borrowing options does Paige have?
4. Does Paige have to borrow the money? How else could she buy the bike?
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CREDIT CARDS
The word “credit” can be a bit confusing as it has two There are two ways of repaying a credit card. One of meanings; an account “in credit” means that there is them charges you interest, but the other does not: money in it that is available to spend. However, if you • Once you receive your monthly statement you repay obtain goods or services “on credit” it means that you the balance in full. You will not be charged any have borrowed the money to make the purchase. interest in this case. Credit cards are available from most banks and allow • You pay off some of the statement balance. Credit you to purchase goods and services up to a certain cards require a minimum payment is made every limit. When you buy something with your credit card, month. This is around 3% of the balance or £5, the amount you spend is paid for by the credit card whichever is greater. If you choose not to pay the provider – it does not come out of your own account. balance in full then you will be charged interest on The provider keeps a record of everything you have the remaining balance plus any further spending the bought and every month you are sent a statement to following month. show how much you have borrowed.
DID YOU KNOW?
If you borrowed £3,000 on your credit card at 21 and only made the minimum repayments, you’ll be almost 50 before it clears!
As with personal loans, potential customers will want money up to that limit on whatever you want without to complete research and make comparisons to secure seeking permission for each purchase. You can also a good APR deal, and the credit card provider will have more than one credit card at a time – provided carry out checks and investigate your credit history your credit rating is sufficiently strong. before approving the credit card. A good credit score Some companies offer low interest rates to new will improve the chances of being given a credit card customers as a way of attracting their business. There and generally mean lower interest rates and access to may be a limited period where interest is 0% and more deals. this might also include “balance transfers” (debt The credit card provider will set a credit limit for transferred from another credit card or loan). After your card – anything from a few hundred to several the introductory period, the interest rate may rise to thousand pounds depending on your personal a higher than normal level to compensate. circumstances. You can then use the card to spend
DID YOU KNOW?
Balance transfers allow you to take out a new card to pay off debt on old credit and store cards which are charging interest. The new card may have 0% interest or have a lower interest rate than you are currently paying, so you will become debt free quicker as the payments you make reduce the debt, rather than paying off the interest.
66 BORROWING BORROWING PRODUCTS
There are some positives to having a credit card: • It is highly convenient when shopping and safer than CASE STUDY carrying cash Nikita, Mackenzie, Jack, and Chika are a group • You can make instant purchases (up to your credit of friends discussing their credit card interest limit) though you should always be confident that rates. Nikita is a trainee chef earning £16,000 you can repay the money per year. She has only just been able to get • Section 75 of the Consumer Credit Act 1974 means a credit card because she missed a couple of your credit card must protect purchases between payments on her mobile phone contract last £100 and £30,000 for free, so if there’s a problem year, so many providers refused her application. you could get your money back. If the firm you Her credit history isn’t fantastic; therefore her are dealing with goes bust or fails to deliver your credit card company gives her an APR of 30%. purchase, you should get your money back from Mackenzie is an IT software developer and has your credit provider. This applies even if you have an excellent credit score, only using his credit only partly paid by credit card card for big purchases like holidays and always • It is good for your credit score if you can show that paying his bill in full at the end of the month. you have borrowed money and paid it back as His credit card company gives him an APR expected; this demonstrates financial responsibility of 5%.
• Bonuses such as air miles, reward points and Jack is not very good with money. He has had cashback may be a feature of a credit card. loans in the past but has struggled to keep on top of the repayments. He has also had a credit card in the past but this was constantly “maxed out” to his credit limit. Only one credit card DISCUSSION company were prepared to give him a credit card and they charge him a whopping APR Having looked at some positives about of 50%. having a credit card, what do you think the possible negatives might be? Chika earns £30,000 as a graphic designer. She always pays off her credit card balance at the end of every month because she has set up a direct debit to make sure that she doesn’t forget to pay her bill. Her card gives her an QUESTIONS: APR of 10%.
1. How do both loan and credit card companies 1. Why do you think individuals have different work out the specific interest a customer interest rates? Is this fair? should pay? 2. How could Nikita and Jack improve their 2. What is a credit limit on a credit card? credit score? 3. Why is it important to understand the Terms 3. What advice would you give Nikita and and Conditions attached to borrowing money? Jack for the future? 4. Why is it a good idea to pay off the balance on a credit card each month, if you can?
67 BORROWING BORROWING PRODUCTS
MORTGAGES PAYDAY LENDERS
A mortgage is a long-term loan used to purchase A payday lender is the name given to lenders who property. On average, a home is the most expensive provide very short-term loans for relatively small thing people buy in their lives. It is just not realistic to amounts of money. As the name suggests, these are try and save up the amount of money required, so a intended to cover any unexpected costs you might mortgage is often used. incur until you are able to repay the loan on your next payday. The term of a mortgage can vary, but most commonly it is 25 years. The cost of repaying the borrowing is Due to the very short-term nature of these types of spread over this term. The borrowing is secured against loan, the interest rates can be very high – 1,500% APR the property you have bought. This means that if you is not unheard of. There are also penalties if the loan is fail to make the repayments your home can be taken not paid off when expected. Compared to other forms back by the lender and sold by them to recover their of flexible borrowing, like an arranged overdraft or a money – this is called repossession. credit card, payday loans are very high cost.
The interest rate on a mortgage is generally one of One of the most controversial issues around payday the lowest compared to other forms of borrowing. This loans is known as the “rollover”. This is where someone is because of the long term and the fact that the loan is unable to pay off the loan at the end of the term is secured. (which could be as little as a week). In this case, the lender may suggest “rolling over” the loan for another More information about mortgages can be week or more. While this may seem like a reasonable found in the ‘Further your knowledge’ section. solution, it significantly increases the interest and charges you will pay.
Before applying for a payday loan consider all your other options, as they are likely to be much more costly.
68 BORROWING BORROWING PRODUCTS
CASE STUDY
Amelia works part time in a garden centre and has Unfortunately, Amelia finds herself having to take just moved into a one-bedroom flat where she lives out a new loan every month to try to clear the debt alone. For the first 2 months, her wages only just that has been building up, but because she needs covered the rent and bills that she needs to pay, but more money for her day-to-day spending and she needs to buy some new items of furniture as to pay the interest on the loans, this simply isn’t well. She takes on extra shifts at the garden centre possible. After 4 months of this cycle, Amelia owes and switches to buying supermarket own-brand £1,500, which is more than she earns each month. food but still can’t afford the furniture. She can’t believe how much she owes and how One evening, Amelia sees an advert on TV for a easy it was to end up in so much debt, it makes company called RapidLoan. It explains how easy her worried and upset. She finally calls RapidLoan it is to apply for a loan with them, and they won’t and tells them she is struggling, and they agree even do a credit check to see if she can meet the that she can repay the outstanding money over the repayments. The interest rate seems high, but she next 6 months. However, they still send her emails can get the money straightaway! regularly offering to lend her even more money, even though they know she can’t afford it. Amelia applies for the loan and the next day has an extra £300 in her bank account. She promises 1. In your opinion, do you think that Amelia will herself she will pay off the loan as soon as she gets be able to pay off her debts in 6 months? If so, paid at the end of the month. why? If not, why not?
She happily buys some new furniture but at the end 2. What impact do you think this experience has of the month her gas and electricity bills are higher had on Amelia? How do you think she feels? than expected and she can’t pay off the loan in full 3. Is the payday lender acting responsibly? Explain and pay her bills too. She feels that her only option your answer. is to take out another loan on top of the one she already has, but she will definitely pay it all back at 4. What advice would you offer Amelia? the end of the month. 5. In your opinion, what other borrowing options does Amelia have?
69 BORROWING BORROWING PRODUCTS
LOAN SHARKS DID YOU KNOW? All of the borrowing we have discussed so far in this Some loan sharks have attempted to charge chapter is regulated by the Financial Conduct Authority interest rates as high as 719,000%. One (FCA). It is an organisation that is set by law to protect woman who borrowed £500 ended up consumers, regulate companies and can fine them, repaying £88,000. You might be harassed or close them down, if they do not abide by the laws. or threatened if you get behind with your It works to make sure that financial markets are honest, repayments – there have been reports of fair and effective so that consumers get a fair deal. people being intimidated or attacked. You If you felt you were not treated fairly you could always might also be pressured into borrowing more turn to the FCA as a last resort to help. money to repay one loan with another and There are circumstances where individuals set end up in a spiral of debt that you can themselves up as money lenders. These individuals are never repay. not regulated by the FCA, and their practise is illegal. As they are not regulated there is no limit to the interest rate they charge or the penalties they can apply. Loan sharks tend to prey on the most vulnerable DID YOU KNOW? individuals, and those who struggle to be accepted for other forms of borrowing, such as those who have Since 2004, the England IMLT have supported a poor credit history. There is a task force in England over 25,000 people and written off over dedicated to investigating and prosecuting illegal £63,500,000 of debt. money lenders – England Illegal Money Lending Team (IMLT).
MANAGEABLE AND UNMANAGEABLE DEBT
Personal circumstances can change without warning, a You spend more borrower might suddenly find themselves unemployed than you earn and therefore not earning enough income to cover You borrow to their debts and repayments. An unexpected family fill the gap crisis may mean money intended for repaying debt has More of your to be diverted elsewhere. income goes to You keep borrowing repaying debts If debt is allowed to grow then it may start to become to maintain unmanageable; if action is not taken it can have your lifestyle serious financial consequences. In the same way, rushing into a substantial (or even unnecessary) The end result: purchase without proper thought, planning, budgeting or the means to repay, might also be seen as taking ALL YOUR INCOME GOES TOWARD on unmanageable debt. Some people try to offset their REPAYING DEBT debt by borrowing even more but this is no solution; a YOU’VE NOTHING LEFT! spiral effect can then ensue. Source: moneysavingexpert.com
70 BORROWING WHAT HAVE YOU LEARNT?
If you borrow to a level that is more than you have, or be of benefit, and this can include the financial you anticipate having, then you may not have enough organisation(s) involved. Many of them now recognise left to pay for what really matters and you could get that they have a “duty of care” towards their customers into financial difficulty. The consequences of severe and will help you to minimise difficulties and get money difficulties can be: yourself back on track with your finances. There are also a number of organisations and debt charities • Financial (difficult to get further credit, that you can turn to in times of need, such as Citizens legal proceedings) Advice, StepChange and National Debtline. • Emotional (stress, difficulties in relationships) • Physical (illness brought on by stress) • Spiritual (loss of self-esteem and the ability to cope). QUESTIONS:
This is why it is so important to make informed and 1. Give one example of a manageable debt manageable choices when dealing with your personal and one example of an unmanageable debt. finances. Hopefully it will never happen, but if you 2. Name two consequences of unmanageable do ever find yourself in a situation where debt has debt. spiralled out of control, then there is help and advice 3. What is probably the worst thing you can available (you can find out more about this in the ‘Risk do if you get into debt? and reward’ chapter). 4. Explain what you understand by the term Talking about your circumstances to someone neutral “duty of care”. and who can give impartial, considered advice can WHAT HAVE YOU LEARNT?
Using the knowledge you have gained from this chapter complete the activity below: ACTIVITY
Carlo has an outstanding balance of £1,000 on his credit card but he urgently needs to replace his broken boiler. As he doesn’t have any savings, and always ends the month overdrawn, he is considering taking out a payday loan to pay for this rather than using his credit card.
1. In your opinion, do you think that Carlo’s credit 3. What other borrowing options does Carlo have? card debt is manageable or unmanageable? 4. Recommend the most appropriate method of Explain your reasons why. borrowing for Carlo and his situation. 2. Should Carlo take out the payday loan or use his 5. Recommend to Carlo how he could reduce the credit card? Explain your answer. balance on his credit card.
71 BORROWING FURTHER YOUR KNOWLEDGE FURTHER YOUR KNOWLEDGE
MORTGAGE BORROWING
Most people buying their own home will have a repayment mortgage. Monthly repayments are made, which go towards clearing some of the original loan, as well as paying some of the interest owed on it. There are three main types of repayment mortgage:
• Fixed rate mortgage: • Variable rate mortgage: • Tracker mortgage: The interest rate is fixed for a The interest rate changes in This tracks or moves in line with specified number of years, so line with the movement of a declared interest rate (usually you will know exactly how much interest rates so you could find the Bank of England base rate). your monthly repayments will be yourself paying differing monthly during that time. If interest rates amounts – sometimes less, rise, you will reap the benefit as sometimes more. This might be your repayments won’t increase; to your advantage but can make you will, of course, lose out on budgeting more difficult. any savings you could make if the rate goes down.
The different interest rates charged will have a bearing on any decisions to be made about taking out a mortgage. In 2017, the average rates were: 1.99% (fixed), 4.23% (variable) and 2.34% (tracker).
To see how repayments are made, have a look at the following example. For a house costing £170,000 (the current UK average house price) you would typically need to find a 5% deposit (£8,500). The loan required would therefore be £161,500. If the mortgage term was 25 years and the interest rate was a fixed 1.99% then your schedule* might look like this:
AMOUNT OF BORROWING YEAR INTEREST CHARGED PRINCIPAL PAID CLOSING BALANCE REMAINING 1 £161,500.00 £3,168.08 £5,036.80 £156,463.20
5 £140,737.76 £2,751.13 £5,453.75 £135,284.01
10 £112,351.56 £2,181.07 £6,023.81 £106,327.75
15 £80,998.21 £1,551.39 £6,653.49 £74,344.72
20 £46,367.58 £855.93 £7,348.95 £39,018.63
25 £8,117.10 £87.75 £8,117.10 £0.00
*Only selected years shown The total interest to be paid on the loan will be £43,621.23.
72 BORROWING FURTHER YOUR KNOWLEDGE
1. Can you work out what is happening with the figures in the interest charged and principal paid columns and why?
2. Now calculate the monthly interest payment.
3. Use the figures to construct a graph or chart showing the relationship between principal paid, and interest charged, over the 25-year term of the mortgage. HIGH COST CREDIT
There has been much concern in the worlds of economics and politics about issues surrounding high-cost credit and the effect it is having on society, particularly on those who might otherwise be financially excluded.
Read the text of a speech given by Andrew Bailey, chief executive of the Financial Conduct Authority in May 2018 about the impact of high cost credit. You can find it at:www.fca.org.uk/news/speeches/ high-cost-credit-what-next
Create a list of 10 bullet points detailing the main points set out in the speech.
MAKING BORROWING CHOICES
Here are some borrowers with choices to make. Compare the deals they are considering by completing a table like the example shown for each. What would you advise in each case?
1. 19-year-old Toni wants £450 to purchase the latest c) Use her store card at an APR of 24%. With this she high-end games console. It would take her much will get reward points to use on future purchases. longer than she would like to save the money and the promotional sale she has spotted ends in a few MONTHLY TOTAL TOTAL COST days’ time. As she has some money set aside, she is REPAYMENT INTEREST OF LOAN confident she can pay everything back within a year. a Her options are: b a) Use her pre-arranged bank overdraft charged at c 18% APR.
b) Apply for a loan from a credit union charging an d) Are there any other options which Toni might wish APR of 12%. to consider?
73 BORROWING FURTHER YOUR KNOWLEDGE
2. Dane is a 25-year-old single parent of twins in 3. Faisal is 22 and works in an office as a trainee. desperate need of a new washer/dryer to keep up Although he is currently on the National Minimum with the demand for clean clothes. This will cost Wage, this will go up significantly when he becomes £500. However, he is finding it difficult to make ends qualified. His one big indulgence in life is watching meet as it is; by cutting back and shopping wisely TV and, as this helps him to stay in and save money, he can probably find £30 a month from his budget. he sees it as a good investment. He would like to His credit rating is likely to be low, but he has never get a new 4K Ultra HD model so wants to borrow checked, and assumes that his borrowing options £3,500 across approximately 3 years to help pay will be extremely limited. His options are: for it. He has calculated he can afford to pay back £110 per month. His options are: a) Buy via a catalogue across 36 months at an APR of 44.9%. There is a 12 month interest free, buy a) Take out a 3 year hire purchase credit agreement now, pay later option. from the dealership where he wants to buy the TV. The APR is 16.5%. b) A 6 month payday loan where the APR is 750%. b) Get a bank loan (also 3 years). The APR is 9.75%. c) A doorstep lender (loan shark) charging the equivalent of 1,200% APR for an 18 month loan; c) Put the money required on his credit card. The repayment is deferred for first 3 months. APR is 15.9%.
MONTHLY TOTAL TOTAL COST MONTHLY TOTAL TOTAL COST REPAYMENT INTEREST OF LOAN REPAYMENT INTEREST OF LOAN a a
b b
c c
d) Are there any other options which Dane might d) Are there any other options which Faisal might wish to consider? wish to consider?
74 MOVING ON FROM SCHOOL – THE WORLD OF WORK
MOVING ON FROM SCHOOL – THE WORLD OF WORK WHAT ARE THE BIG FINANCIAL DECISIONS I’LL NEED TO MAKE?
In this chapter you’ll explore some of the financial matters and decisions that you might face as you move on from full-time education.
These include understanding the ways that people get paid for work, the National Minimum Wage and National Living Wage, the financial implications of going to university, and making plans for when you retire from working.
DID YOU KNOW?
According to an Oxford University study, almost 50% of jobs existing today will be completely redundant in seven years.
75 MOVING ON FROM SCHOOL NEXT STEPS: APPRENTICESHIP NEXT STEPS AFTER SCHOOL When you leave school or college there are three main options available to you:
1. START AN APPRENTICESHIP
An apprenticeship combines practical training in a job You’ll also be entitled to at least 20 days paid holiday with study. As an apprentice you will: per year, plus bank holidays.
• Work alongside experienced staff • Gain job-specific skills ACTIVITY • Earn a wage and get holiday pay 1. An average working week is 35 hours. • Get time for study related to your role (usually one What is the minimum an apprentice can earn day a week). per week?
Apprenticeships can take between 1 to 5 years 2. Are there any costs you can think of which you to complete, depending on their level (there are might have to pay? intermediate, advanced, higher and degree level apprenticeships).
If you take an apprenticeship you will be paid for it. The minimum you’ll get will be the National Minimum Wage for apprentices (which in 2018 was £3.70 per hour), however some employers will pay more.
2. EMPLOYMENT
There is a wide range of work available for school and The National Minimum Wage is exactly that – it’s college leavers. For those going straight into work from the minimum an employer can pay. Employers can school or college there is also a National Minimum choose to pay more than this but must pay at least the Wage. This varies according to your age, and the rates National Minimum Wage for the age of person they change every April. For 2018 this was: employ. The amount paid by employers is determined by a number of factors, including: Under 18 – £4.20 per hour • The level of responsibility within the role 18-20 – £5.90 per hour • The skills required to do the role 21-24 – £7.38 per hour • The level of experience they are looking for. Over 25 – £7.83 per hour If you choose to work for yourself (be self-employed) then the minimum wage does not apply.
76 MOVING ON FROM SCHOOL NEXT STEPS: APPRENTICESHIP
Ways you can be paid Different types of employment contracts There are a number of ways people are paid for the work that they do: There are a number of different ways that you can be • Salary – A set amount of money paid once a employed in the UK. The most common ones include: month. This is based upon an agreed amount • Full time – Usually working 35 hours or more a you would earn in one year. week, full-time workers are provided with a contract • Hourly rate – You are paid a set amount for of employment and receive benefits such as holiday every hour you work. The more hours you do, pay, sick pay and pension opportunities. the more you are paid. This is usually paid to • Part time – Usually works fewer hours than a full- you weekly or monthly. time worker but receives the same treatment and • Piece work – You are paid a set amount for benefits (though these may be proportionate to the every unit you produce (e.g. picking a full punnet number of hours worked per week). of raspberries). The more units you produce the • Short term contract – This can be on a full or more you are paid. This can be paid daily, weekly part-time basis but is only for a fixed period of time. or monthly. • Zero hours contracts – These are casual contracts • Commission – Often linked to a salary in sales that offer no guarantee of any work. They often related jobs. For example, you may receive a share benefit employers who require staff at short notice of the sales you make. This is paid in addition to a to meet a temporary, or increased, need and can monthly salary. benefit employees as they may allow flexible working You will explore even more ways you can be paid later around other commitments. People on zero hours on in the chapter. contracts are entitled to the National Minimum Wage and holiday pay, however with no guarantee of any work, and therefore income, zero hours contracts can make budgeting and planning your
finances very difficult, as you don’t know what you
will receive in income from one month to the next.
The “gig” economy
The gig economy is a term that is used to describe the DID YOU KNOW? growing trend towards short-term contracts compared to permanent employment. Many people involved According to the Department for Business, in this form of work are actually self-employed – Energy and Industrial Strategy, 4.4% of they work for themselves rather than being directly the British population have worked in the employed by an organisation. Workers get paid for gig economy – that’s approximately each “gig” they complete, for example providing 2.8 million people. courier services or delivering food.
77 MOVING ON FROM SCHOOL NEXT STEPS: UNIVERSITY
3. GO TO UNIVERSITY
Most university courses last for 3 years, during which time you may be studying for a degree. There are costs associated with going to university, such as accommodation and living expenses, and for those going to university in England the cost of the course itself – called the tuition fee. Most students will take out ACTIVITY a student loan to cover these costs. We’ll find out a lot more about these later in the chapter, but student loans 1. How much would a 19-year-old on National are a way of helping fund the costs of university and Minimum Wage earn over a 35-hour week? are then repaid according to your income once you What about a 28-year-old? get a job.
2. Calculate how much the two people above • For the 2018/19 year the maximum tuition fee would earn in a year (hint: there are 52 weeks is £9,250 per year. in a year). • Living costs, such as accommodation, food, clothes, study books, travel and going out vary according to where in the country you go to university. A UK average cost is estimated to be around £230 per week.
QUESTIONS Although there are costs associated with going to university, the hope for many students is that the 1. Which types of employment contracts qualification they leave with will enable them to enter provide the best protection for the career of their choice and potentially at a higher UK workers? income level. 2. In your opinion, what are the benefits and implications of working in the gig economy? ACTIVITY
1. If an English university charged the maximum tuition fee for a 3-year degree, what would the total tuition fee be, based on the 2018/19 year?
DID YOU KNOW? 2. An average university year is based on 40 weeks. How much is the average cost Nearly a third of 18-year-olds in the UK of living for a 3-year degree? go to university and by the age of 30, the percentage rises to nearly 50%.
Source: www.theguardian.com
78 MOVING ON FROM SCHOOL STUDENT FINANCE
Student finance If you choose to do a 4-year course these figures would increase. We’ve seen that there are costs for those people who want to go to university, but there is also financial This sounds like a lot of debt, but it is very important support in the form of student loans. to have the full picture about when and how much you will have to repay: Student loans 1. You only start to repay any loans once you have got your degree, left university and got If you decide to go to university you can apply to the a job earning over a certain amount. Students Loans Company (SLC) for a Tuition Fees Loan. The SLC will pay the fees to the university directly. 2. You only repay when, or for as long as, you earn more than £25,000 per year. In addition to a loan needed to pay the tuition fees, most students will also apply for a Maintenance Loan to You repay 9% of anything you earn over £25,000. cover their day-to-day living costs, like accommodation, So, if you earn £30,000 a year you would pay back food, transport, phone and laptop costs. The SLC will 9% of £5,000. That’s £450 in a year. If your income pay the Maintenance Loan directly to you. drops below £25,000 your repayments will stop and only re-start again once you earn above £25,000. You will then owe money to the SLC but you do not have to pay it back until you leave university, are in Note that the earnings threshold does tend to work and earning above a certain level. This applies to increase each year, making the amount you are able both the Tuition Fee Loan and Maintenance Loan. to earn before you start making repayments slightly The maximum you can borrow depends on how much higher. This accounts for the impact of inflation – the your parents/carers earn (the household income) – increasing cost of goods and services from one year for example, in the 2018/19 year this was £8,700 to the next. (£11,354 if studying in London). If the household 3. After 30 years, all remaining debt is wiped. income is about £25,000 you can expect to get the full loan each year, but as household income rises the If you still owe any money on your student loan after Maintenance Loan is reduced. If household income is 30 years (from the April after graduation) the debt very high there is still a minimum Maintenance Loan is cancelled. If you never get a job earning over the given to students of about £3,000, so the student will threshold, it means you won’t have repaid a penny. be expected to make up this gap, likely to be with If you still owe £20,000 after 30 years the debt is money from parents, as it is due to the parents/carers cancelled, and you owe nothing. higher income that the student receives less. 4. The loan repayments are made The Maintenance Loan is split into three payments, automatically. which are paid directly into your bank account at the start of each term. So, unlike tuition fees, you are in All student loans since 1998 have been repaid control of how your maintenance loan is used. through the payroll – this means that once you’re working, your employer will deduct the repayments If you did a 3-year university course, and borrowed the from your salary before you get it (we’ll look at maximum Maintenance Loan each year, at the end of this more a little later on). The amount you receive the course you would owe the SLC approximately: in your bank account each month already has £27,750 Tuition Fees Loan (3 x £9,250) it removed. So, you don’t have to worry about organising how to pay the debt – it will be paid £26,100 Maintenance Loan (3 x £8,700) automatically. £53,850 Total Loans
79 MOVING ON FROM SCHOOL STUDENT FINANCE
5. Student loans DO NOT go on credit files.
When you borrow from a bank for a credit card, loan or mortgage, lenders look at three pieces of CASE STUDY information before they decide whether or not to give you the loan: your application form; any previous Syrah is a first-year student on a 3-year dealings they’ve had with you; and crucially, the degree course. After 3 weeks of her course information on your credit reference files. she has noticed that her maintenance loan is being spent faster than she had expected. Her Your credit history will be listed on these files – but parents’ income allowed her to receive the full student loans are not included. This means the maintenance loan and at the start of term she money you owe on a student loan will not impact had £2,880 paid into her bank account. The your credit worthiness. first term lasts for 12 weeks.
As it’s her first year, Syrah lives in a hall of Interest on student loans residence. The cost of this was £1,440 for the As with other forms of borrowing, interest is also term, which had to be paid in the first week. applied to student loans and will be taken into account She has looked at all of her expenses to date when your repayments are calculated. To find out more and worked out that after 3 weeks she has spent about the impact of interest on borrowing, take a look the following: at the ‘Borrowing’ chapter. Food and drink ...... £120
Clothes ...... £60
Transport ...... £54 DID YOU KNOW? Mobile phone ...... £36 Laundry ...... £30 The way student loans work is different in England, Scotland, Wales and Books ...... £60 Northern Ireland. Socialising ...... £105 This information is for an English student attending an English University. Insurance ...... £36 Gym membership ...... £6
Total spending over 3 weeks is ...... £507
To help Syrah keep track of her spending, prepare a weekly budget for her. DISCUSSION What advice would you give to Syrah to help manage her money? Because of the way student loans are repaid there is an argument that they are more like a graduate tax than a loan repayment. What do you think?
80 THE WORLD OF WORK EARNINGS
STUDENT BURSARIES, GRANTS AND EARNINGS SCHOLARSHIPS Whether you go straight into work from school, follow an apprenticeship, or go to university, you’ll expect to earn some money for the job you end up doing. In addition to the student loans that are available from SLC it is very important to explore other possible It may sound simple to work out exactly how much you sources of income. will be paid for the work you do, but it’s not always as straightforward as you think. There are a number of Many universities offer bursaries, which are usually things which are taken off the amount you earn before cash awards – e.g. £1,000. These do not need to you receive it – you don’t always get to take home be repaid and are available to help students whose everything you earn. These are called deductions. household has a low level of income. The main deductions you will come across will be: A scholarship is also often a cash award, this time • Income Tax – tax based on your earnings given to students who do particularly well in their exams preceding university or college. The scholarship • National Insurance – tax on earnings to help pay for may be awarded by the university or a company and state benefits such as state pension and sick pay may pay the tuition fees for a course in full or in part. • Pension contribution – often paid by both the Some universities also offer grants. This again is a cash employer and employee to build up a pension pot award that you do not have to repay. It is usually given for when you retire for a very specific purpose, like studying abroad or • Student loan repayment – paying back the money undertaking research that costs a bit of money. you borrowed (plus interest), but only if you earn If you are a student with a learning difficulty, health over the threshold. problem or disability you may also be entitled to claim When you receive your pay from your job, you’ll most for Disabled Students’ Allowance to cover some of the probably also receive a payslip. This piece of paper extra costs to support your additional needs. This does contains information about you and your earnings. not have to be repaid. Your payslip will also show all of your deductions. There are also certain degree courses that attract specific bursaries, grants and scholarships because the economy needs more people to qualify from them. A good example is if you wanted to become a maths teacher – there is extra funding because there is a shortage of maths teachers.
All of this extra funding has to be applied for, so it is really important for potential students to carry out research and make sure they are not missing out on money that could help them while at college DID YOU KNOW? or university. According to official UK government data, There is also the option of taking on part-time work £185 billion was collected from Income Tax while at university to generate extra income, however payments in 2017, an increase of £8 billion you would need to ensure that this doesn’t affect from the year before. your studies.
81 WORLD OF WORK PAYSLIPS
Look at the payslip for Sam Green who is a senior stylist in a national chain of hairdressers.
DATE EMPLOYER EMPLOYEE 30/06/2018 Brushes Hair Salon S Green
DEPARTMENT N.I. NUMBER TAX CODE PAY METHOD PERIOD Hairdressing YX542789 1185L BACS Month 3
DESCRIPTION UNITS DUE DEDUCTIONS TOTALS TO DATE
Total Gross Pay 4,875.00 Taxable Pay 1,912.50 Tax 117.60 Tax Paid 352.80 Basic Pay N.I 110.76 Employee NI 332.28 Pension 48.75 Employer NI 382.11 Employee Pension 146.25 Employer Pension 97.50
HOURS GROSS PAY DEDUCTIONS NET PAY
Standard 35 1,625.00 277.11 1,347.89 hours per week
PAYSLIPS EXPLAINED
DISCUSSION Deductions On the payslip you can see that amounts for Income Before reading more about payslips, what do Tax, National Insurance contributions, and pension you know already? will be deducted from your gross pay. These are called • What is the tax called that you can see on compulsory deductions because you must pay them. the payslip in deductions? People who borrowed money to go to university and • What does NI stand for? earn over the income threshold may also have student loan repayments taken off their gross pay. • Why is this Month 3? • What is the significance of the numbers in the Income Tax tax code? Everyone is allowed to earn some money before they • What is Sam’s take-home pay? start to pay Income Tax.
This is your Personal Tax Allowance. It is set by the government each year, for example in 2018/19 this is £11,850 per year for most people. The income that you earn above your personal tax allowance is called your taxable income.
Once your income goes above this allowance you will pay Income Tax.
82 THE WORLD OF WORK PAYSLIPS
It will start at Any annual income above Any annual income over £46,350 is taxed at £150,000 is taxed at 20% On anything you earn above 40% 45% £11,850 up to £46,350 up to £150,000
This means that for those on the lowest income they Charging different rates of tax at different levels of pay no Income Tax at all, but the more you earn the income is known as tax banding. higher the amount of Income Tax you pay (although the You can find updated allowances and tax rates at more you earn the more you take home too!). www.gov.uk
Worked examples
We will assume the following 2018/19 figures:
Personal Tax Allowance – £11,850 Basic Tax Rate – 20% on your first£34,500 of taxable income (from £11,850 to £46,350) Higher Tax Rate – 40% on taxable income of £34,500 to £150,000
1 A cleaner who earns £15,000 per year Income (£) Tax rate (%) Tax paid (£) – how much Income Tax do they pay? 11,850 0 0 The cleaner pays £630 Income Tax per 3,150 20 630 year (just over £50 per month). This is Total 15,000 630 4.2% of their income.
2 A lorry driver who earns £30,000 per Income (£) Tax rate (%) Tax paid (£) year – how much Income Tax do they pay? 11,850 0 0 18,150 20 3,630 The lorry driver pays £3,630 in Income Total 30,000 3,630 Tax per year (just over £300 per month). This is 12.1% of their income.
3 A software developer earns £70,000 per Income (£) Tax rate (%) Tax paid (£) year – how much Income Tax do they pay? 11,850 0 0 34,500 20 6,900 The software developer pays £16,360 in 23,650 40 9,460 Income Tax per year (just over £1,360 per Total 70,000 16,360 month). This is 23.37% of their income.
In this last example, you can see that the person is paying some of their income at the higher tax rate. Notice that it is only some of their income and not all of it that is taxed at the higher rate of 40%, and they are still entitled to the personal tax allowance.
83 THE WORLD OF WORK TAX AND NATIONAL INSURANCE
QUESTIONS DID YOU KNOW?
1. What do you call the amount you are allowed If you add a zero to the numbers in your to earn before you begin paying tax on your tax code it will tell you how much you are earnings? allowed to earn before paying Income Tax. 2. How does tax banding attempt to ensure a fair For example, if you code is 1185L, your tax system? personal tax allowance will be £11,850 3. What is meant by the term “deductions” on a payslip? National Insurance
Everyone receives their National Insurance number Tax Code just before their 16th birthday. It will stay with you Your Tax Code will show how much income you are for life. Most people who work have to pay National allowed to earn before you start to pay Income Tax – Insurance contributions. your personal tax allowance. It is the first 4 numbers National Insurance is paid at approximately 12% of of your tax allowance followed by a letter. Most people your income. In 2018/19 there is a lower earnings limit have the letter “L”, which indicates that they have the of £8,424, below which you pay no National Insurance basic tax allowance. at all. There is also an upper threshold of £46,350, It is your responsibility to check that the tax code on above which you only pay 2% of your income. your payslip is correct. If it’s not, you could be paying National Insurance contributions help to build up your too much tax and need to get a rebate (a refund of your entitlement to certain benefits, such as state pension, overpayment). Or, you could be paying too little and will maternity allowance and financial support if you are need to get in contact with HM Revenue and Customs unable to work. (HMRC) to correct it. This can happen to students who In addition to employees paying National Insurance, take on part-time work, so be careful to check your tax it must also be paid by your employer for every worker code, and if you think you’re paying too much Income they employ. If you look at the sample payslip you can Tax contact HMRC. see that the amounts are similar, but the employer pays Anyone of working age, whether they are an employee slightly more per month. or self-employed, can track and manage their tax and National Insurance contributions using the Government Worked examples Gateway online portal. How much National Insurance would the following pay? ACTIVITY a) A newly-qualified nurse earning £23,000 per year Answer – On the first £8,424 of their salary Work out how much tax would be paid by: National Insurance is £0 They pay 12% on the remaining £14,576 1. A part-time librarian earning £11,000 per year. of their salary 2. An engineer earning £55,000 per year. = £1,749 per year (or £146 per month) They do not earn enough to reach the 3. A professional diver earning £83,000 per year. upper threshold
84 THE WORLD OF WORK TAX AND NATIONAL INSURANCE b) A lawyer earning £60,000 per year Gross pay
Answer – On the first £8,424 of their salary The total income that you receive before any deductions National Insurance is £0 are made is called your gross pay. Gross pay will always They pay 12% on the next £37,926 of their salary be bigger than net pay. = £4,551 per year In the sample payslip, Sam received basic pay after They pay 2% on the final £13,650 of their salary working for a standard 37.5 hour week. Other amounts = £273 per year are sometimes added to the basic pay. For example, So, in total, the lawyer pays £4,551 +£273 if you work longer hours than the standard week you = £4,824 per year (or £402 per month) might earn overtime pay. Also, if you successfully meet some targets set for you, you could earn a bonus.
ACTIVITY
Calculate how much National Insurance you would pay if you earned:
• £10,000 per year.
• £30,000 per year.
• £100,000 per year.
85 THE WORLD OF WORK TAX AND NATIONAL INSURANCE
Net pay
This is the pay you have left after your deductions have been removed. It is sometimes called your take-home pay. All the deductions are made before you receive the money so that you do not have to do anything about it. This system is called Pay As You Earn (PAYE).
Total deductions Voluntary deductions:
This sums up all the deductions taken from your pay. • Some people also make payments to a charity or On the sample payslip you can see the Total Tax Paid, save into a credit union account. Total Employee NI and Total Employee Pension.
If you were to leave the organisation that is paying you, then you should receive a P45 form. This would contain: • Your leaving date. QUESTIONS • How much tax you have paid so far in this tax year. 1. Explain the difference between gross How much pay you had earned so far in this tax year. pay and net pay.
A UK tax year runs from 6 April to the following 5 April. 2. Name three deductions you might see So, this payslip for June is month 3. At the end of the tax on a payslip. year your employer should give you a P60 form which 3. What does the term PAYE mean? will tell you:
• The total amount of tax you have paid in the tax year.
• The total amount of pay you have earned in the tax year.
Other deductions from your payslip
Pension scheme contributions:
• Many people contribute to a pension scheme (a different one from the state pension that you qualify for by making National Insurance contributions) • These pension contributions are taken from your gross pay. Importantly, pension contributions are taken off your gross pay before Income Tax is calculated. This means the pension contributions DID YOU KNOW? result in you paying less Income Tax More people than ever are setting up their • If you pay tax at the 20% rate this means that for own business and according to the Office every £10 you put into your pension, you are making of National Statistics, 4.8 million people a further tax saving of £2 in Income Tax. (15.1% of the labour workforce) were self-employed in 2017, compared to 3.3 million (12% of labour workforce) in 2001.
86 THE WORLD OF WORK SELF-EMPLOYED
People who are employed will have their tax deducted SELF-EMPLOYED each month before they receive their income and are able to see the Income Tax they have paid on their payslip. Those who are self-employed have to complete A person is self-employed if they run a business for a Self-Assessment Tax Return once a year. They tell the themselves and take responsibility for its successes and government what their business income and expenses failures. They may also be an independent contractor are and it calculates the tax they are required to pay. who provides a service for an organisation when the business does not have the staff to provide this BEWARE – It can be a lot harder to make sure you themselves. Self-employed people have the flexibility to have put aside enough to pay your tax bill as a choose when they work, and how much work to take on, self-employed person as you only make one or two however they do not benefit from many of the rights that payments per year. The rule of thumb is to put aside employees have, such as holiday pay or sick pay. 30% of everything you earn to make sure there is enough to pay the tax owed. For people who are self-employed the same tax bands apply, but they only pay tax on their profits: Worked examples Business income – Business expenses = Profit How much National Insurance would the following pay? • Business income is the money you are paid by your a) A self-employed gardener earning an annual profit customers. For example, the business income of a of £22,500 window cleaner is all of the money paid to them by customers for cleaning their windows over the year Answer – Class 2 National Insurance – £2.95 x 52 (weeks in a year) • Business expenses are the costs that you incur in = £153.40 order to run your business. For the window cleaner, Plus, Class 4 National Insurance – on first £8,424 this might be the cost of running a van and the of profits, National Insurance is £0 materials needed to clean the windows. Then pay 9% on remaining £14,076 of profits Once the profit has been worked out, it is taxed using = £1,267 the same tax bands we have seen before. They do not earn enough profit to pay the People who are self-employed also pay National upper threshold Insurance through their Self-Assessment Tax Return. In Total National Insurance = £153.40 + £1,267 2018/19 there are two types to pay: = £1,420.40 Class 2 National Insurance – a fixed rate of £2.95 per week if your profits are above £6,205 plus;
Class 4 National Insurance – based on the business ACTIVITY profits below 1. Work out how much tax would be paid by a self-employed electrician earning a profit of Business Profit National Insurance £28,00 per year. Up to £8,424 0% £8,424 - £46,350 9% 2. Calculate how much National Insurance a self-employed gardener with £48,000 profit Over £46,350 2% per year would pay.
87 THE WORLD OF WORK METHODS OF PAYMENT
METHODS OF PAYMENT
When you enter employment, you may well be paid in a variety of ways. Here is a list of some of the methods of payment with a brief explanation.
Wages: Earnings paid on an hourly basis. Salary: Earnings paid monthly into a bank or building CASE STUDY society account. In many jobs you would not be entitled to get overtime as you would be expected to put in Spot the difference extra hours when required. Commission: Payment based on the value of sales Alba and Tyrell are both plumbers. Alba has been you make. Sometimes you get it in addition to a self-employed for 3 years and gets her business basic salary. largely through word of mouth. She charges £30 Piecework: Payment for each item you produce. per hour for her labour and at the moment has no The more you produce, the more pay you will get. problem finding work; some of her customers have even been waiting for 2 months for her to be able to Fees: A one-off payment for a professional service. work for them. Alba loves watching live music and Bonus: An additional payment for working hard or really likes the flexibility of working for herself so that hitting targets. when she wants to she can finish early. Or, she can Overtime: When you work longer hours than is take a day off at short notice if she has to travel far in your contract you can volunteer to work longer to a gig. She very rarely works at the weekend. (overtime) usually at a better rate than normal e.g. “double-time”. Tyrell is employed by a large company. He gets a salary of £30,000 per year and is entitled to 32 Shift payment: This is paid for working unusual days holiday per year plus bank holidays. He works hours, for example, during the night. It would be in a 40-hour week but is often given the chance to addition to your normal pay. work overtime at double pay. Most of his work Minimum Wage: An hourly rate that your employer is maintaining existing properties that are run by cannot drop below. See previous section on NMW housing associations. Tyrell also has to regularly and NLW. work a night shift at weekends, which means he often cannot play football – his main interest outside work. Tyrell enjoys the security of a regular salary but knows he might earn more if he was self-employed.
DISCUSSION
Can you spot five differences between Alba and Tyrell’s jobs?
88 THE WORLD OF WORK WHY DO WE PAY INCOME TAX? WHY DO WE PAY INCOME TAX? What is the history of Income Tax and why do we pay it?
Income Tax was introduced by William Pitt the Younger more than 200 years ago when he needed the money to pay for the wars against Napoleon, the leader of France. For many years, Income Tax was only paid by the very rich, but in the 20th century it began to rise and, by 1930, 10 million people were paying Income Tax. The rates rose again to pay for the Second World War and, in 1944, the system of Pay As You Earn (PAYE) was introduced.
Today, Income Tax is the biggest individual source of income for the government and accounts for nearly 25% of government income. This, together with the income the government raises from other sources, is used to pay for all the various areas of government spending.
CASE Examples of government spending include: STUDY • Provision of State Pensions, • The Armed Forces – keeping low income support and the Army, Navy and Royal Air Tom works in sales; the Jobseeker’s Allowance Force up to date with the latest company he works for • The National Health Service technology, and paying the pay him a basic salary of (NHS) – building hospitals, salaries of our military personnel £15,000 per year, plus 5% providing treatment and paying • Local councils – providing of the value of any sales doctors and nurses services such as emptying your that he makes. Last year he • Spending on schools, colleges rubbish bins, cleaning the made £500,000 in sales. and universities streets, etc. Next year, his target is £800,000 in sales and if he All of these services, and many more, are paid for by the government and meets the target he gets the to do so they must use the income that they receive from taxation. Not just same 5% bonus on top of Income Tax but also National Insurance, Value Added Tax (VAT), Council Tax, his basic salary. taxes on business profits, vehicle tax, and taxes on alcohol, cigarettes, etc.
Lisa also works in sales, but she is on a salary of £52,000 per year with no commission. DID YOU KNOW? If her sales rise or fall her salary stays the same. Income Tax and National Insurance are both collected by HM Revenue and Customs. Income Tax is used to help Who do you think has provide funding for public services such as education and the best pay deal, the welfare system, while National Insurance contributions Tom or Lisa? Explain are used to build up an individual’s entitlement to state your choice. benefits such as the state pension.
89 THE WORLD OF WORK WHY DO WE PAY INCOME TAX?
ACTIVITY
What happens to our taxes?
The table below shows the money that was raised in the UK through taxation for 2016/17. As you can see, there are different ways the government collects taxation from individuals and businesses.
PUBLIC SECTOR REVENUE 2016/2017 £BILLION Income Tax Income Tax £182 National Insurance National Insurance £126 Excise duties Excise duties £48 Corporation tax £43 Corporation tax VAT £138 VAT Business Rates £28 Business Rates Council tax £30 Council tax Other (taxes) £69 Other (taxes) Other (non-taxes) £51 TOTAL £715 Other (non-taxes)
1. Identify which taxes may affect you in the future. 2. What effects will these have on you? Think about positives and negatives. The next table shows how this revenue was spent by the government in 2016/17
UK GOVERNMENT SPENDING 2016/17 £BILLION Debt interest Debt interest £39 Other (inc. EU spending) Other (inc. EU spending) £49 Public order and safety Public order and safety £34 Housing and environment £34 Housing and environment Industry, agriculture and employment £24 Industry, agriculture and employment Defence £46 Defence Education £102 Education Transport £29 Transport Social protection £240 Social services £30 Social protection Health £145 Social services TOTAL £772 Health
Source: Office for Budget Responsibility 2016/17
3. Which parts of the public sector receive the most funding?
4. By looking at the totals it is clear to see that the government spends more than it raises in tax. Is this a problem?
5. In your opinion, do you think tax is a good thing?
90 THE WORLD OF WORK PENSIONS PENSIONS A pension is a specific type of long-term savings plan that you build up during your working life to fund your retirement (when you stop working in later life). It is intended to provide money for people to live on once they no longer receive an income from work.
Most people will pay into a pension scheme and these payments will appear on your payslip in the deductions section. Putting money into a pension scheme is like having a savings account, but unlike normal savings you cannot use your money until you reach retirement age.
There are two main types of pension:
1. THE STATE PENSION 2. WORKPLACE PENSIONS
This is paid by the government. To qualify for the state These are set up by your employer. You will pay a pension, you must have paid National Insurance (NI) percentage of your monthly income into the pension. contributions for a certain number of years. This is taken off your gross income before it is taxed. This means your pension contribution is tax free. The number of years you have paid National Insurance contributions will affect the amount of state pension Another huge benefit of a workplace pension is that you receive. To qualify for the maximum state that your employer will also contribute to it. This is pension, you would need to pay NI contributions for additional to your income and is also tax free. a minimum of 35 years. This would mean you would currently receive approximately £165 per week (2018) The money paid in by you and/or your employer is from your state retirement age. put into investments (see the ‘Risk and reward’ chapter) by your pension provider. The amount you get when The state retirement age has changed in recent years, you come to withdraw from your pension depends on but for most people it will eventually be 68 for both how much was paid in and how well the investments men and women. However, this age is regularly have done. reviewed by the government as advances in healthcare enable people to work and live longer. The pension provider is the company or organisation that looks after your pension for you. They may be chosen for you by your employer, or you may be able to choose your own. It is very important to know who your pension provider is and what they intend to do with your money as the value of your pension pot can go up or down depending on your investments.
91 THE WORLD OF WORK PENSIONS
AUTOMATIC ENROLMENT INTO ACTIVITY WORKPLACE PENSIONS Key facts about the ageing population in the UK: Since February 2018 all existing and new employers must automatically enrol any eligible members of staff • In 1901, the life expectancy for women was into a workplace pension scheme. This means the 45, and 49 for men vast majority of people will start a pension from the beginning of their working life. • In 1961, the life expectancy for women was 76, and 71 for men Auto-enrolment applies to employees between the age of 22 and their state retirement age, who earn over • In 1998, the life expectancy for women was £10,000 a year and work in the UK. 80, and 75 for men
There are minimum amounts that must be contributed, • In 2017, the life expectancy for women was and by 2019 the employee must contribute a minimum 83, and 79 for men. of 5% of their pay and the employer must contribute a Using the above figures: minimum of 3%. Both employees and employers can decide how much to contribute to the pension scheme, 1. What trends are occurring in life expectancy the more that goes in, the bigger the amount of money in the UK? there will be when the worker retires. 2. What do you think is happening to the Along with the state pension, self-employed individuals proportion of someone’s life which is can also set up their own private pension with a spent working? pension provider. These operate similarly to workplace 3. What are the financial implications of these pensions but obviously there is no employer to choose trends for each of the groups below: a scheme for you and no employer contributions. • The government People may also choose other ways of building up a • People who are still working retirement fund, for example by investing in a stocks • People who are retired. and shares ISA or property. But remember that anyone opting out of a workplace pension scheme would lose their employer’s contributions.
QUESTIONS
1. Explain the difference between the state pension and a workplace pension scheme. 2. What is the benefit to younger people of auto enrolment?
92 THE WORLD OF WORK PENSIONS
CASE STUDY
The average pensioner in the UK
In 2017, a typical pensioner needed a minimum annual income of approximately £10,850 in order to cover basic living costs, the breakdown was as follows:
£1,600 Recreation and culture (TV subscriptions and equipment, hobbies, etc.)
£1,550 Food and non-alcoholic drink
£1,500 Housing, fuel and power (rent and maintenance, but not mortgages)
£1,250 Transport (rail fares, cars, etc.)
£850 Household goods and services (furniture, appliances, etc.)
£800 Restaurants and hotels
£400 Clothing and footwear
£250 Alcohol and tobacco
£200 Health
£350 Communication (phones, stamps, broadband, etc.)
£850 Miscellaneous goods and services (personal care, insurance, bank charges, etc.)
£1,250 Other expenditure items (mortgages, council tax, interest on credit cards, payments to children, etc.)
Total: £10,850
Using the information above and what you know about the size of the state pension, what advice would you give to someone planning for their retirement?
Source: Adapted from research by Key Retirement based on family spending data from the Office for National Statistics.
93 THE WORLD OF WORK HELP FOR PEOPLE ON LOW INCOMES HELP FOR PEOPLE ON LOW INCOMES THE NATIONAL MINIMUM WAGE AND NATIONAL LIVING WAGE
In the UK, a National Minimum Wage was created by the National Minimum Wage Act 1998. It was introduced to prevent workers under the age of 25 on low pay being exploited by employers.
In 2016, the Act was amended, and a National Living Wage was introduced for workers who are 25 and over.
The rates for both the National Minimum Wage (NMW) and National Living Wage (NLW) are reviewed each year. In 2018, the NMW for an 18 year old was nearly £6 per hour and the NLW was nearly £8 per hour.
In addition to these laws, over 3,500 employers are also committed to paying the UK Voluntary Living Wage Rate, which is set by the Living Wage Foundation campaign group. This is independently calculated and designed to reflect the “real cost of living in the UK and London”. It tends to be higher than the NLW but is not enforceable by law.
WELFARE SYSTEM ACTIVITY
In the section on the history of Income Tax and why we Find out what the current rates are for the NMW, pay it, we saw that some of the Income Tax collected by NLW and UK Voluntary Living Wage. the government is used to support those on low levels of income. In pairs or small groups, discuss why you think the government has not made the NLW the same People on low incomes, or people who have no as the Voluntary Living Wage. income, may be entitled to claim benefits to help them pay for essential living expenses. Since 2013, a new system has gradually been introduced called Universal Credit.
Universal Credit replaces a range of benefits such as Income Support, Housing Support, Working Tax Credit and Child Tax Credit. Therefore, people entitled to claim Universal Credit will receive one type of support. If your income goes up because you can work more or earn more, the intention is that the level of Universal Credit will gradually reduce.
94 THE WORLD OF WORK WHAT HAVE YOU LEARNT?
WHAT HAVE YOU LEARNT?
Using the knowledge you have gained from this chapter, complete the activity and case study below:
ACTIVITY
Create an online blog (or film a vlog) for a young person who has recently got their first full-time job.
Summarise:
• The deductions that will be made from their income
• Where these deductions go and how they are then spent.
CASE STUDY
Daisy is 18 and has recently left school to pursue a career in jewellery design. She is unsure about which career direction to take and is looking at the following options: a) Study a degree in Jewellery Design b) Undertake an advanced apprenticeship in Art and Design c) Find a job in jewellery design d) Set up her own jewellery design business
1. What financial considerations would Daisy need to make for each option? 2. Discuss the financial benefits and risks of each option. 3. In your opinion, what advice would you give to Daisy?
95 THE WORLD OF WORK FURTHER YOUR KNOWLEDGE FURTHER YOUR KNOWLEDGE TAX BANDS PENSION CONTRIBUTIONS Jamie graduated in Digital Media and got her first full-time job as a social media assistant working for Question 1 a leading leisure company. Her starting salary was £25,350 per year, and for the next 3 years she received Hebron has been automatically enrolled into his an annual pay rise of £3,250. Recently she has been employer’s workplace pension scheme, and has decided promoted to social media manager and has received a not to opt out of the scheme. His employer, JW Garden further pay increase of £8,875. Design Ltd, has issued the following information to staff about how much they intend to contribute and how 1. Based on 2018/2019 tax bands, how much much the employees will be expected to contribute per Income Tax will she pay? year. Both contributions are worked out as a percentage of each employee’s basic salary. 2. How much does Jamie have left after Income Tax has been deducted? TOTAL EMPLOYER PAYS EMPLOYEES PAY 3. What proportion (%) of her current salary is CONTRIBUTION Income Tax? 3% 5% 8%
Last month, Jamie performed really well, and her boss rewarded her with a one-off bonus of £5,000 paid If Hebron earned £18,000 per year his employer through her salary. would contribute £540 per year (£45 per month) and he would contribute £900 per year (£75 per month). 4. Again, based on 2018/19 tax bands, how much Income Tax will Jamie pay now? a) Imagine Hebron’s salary is £24,000 and, using the data above, calculate the pension contributions that 5. What proportion (%) of her salary is now would be made by Hebron and his employer. Income Tax? Hebron’s employer plans on increasing the pension 6. As a result of the bonus payment, how much extra contributions in 2020, these are: tax will she pay? TOTAL EMPLOYER PAYS EMPLOYEES PAY 7. In pairs, discuss what impact this bonus will have on CONTRIBUTION her income? 6% 8% 14%
b) If his salary remains the same, calculate the pension contributions that would be made by Hebron and his employer.
c) Does this increase in contributions mean he will receive a larger pension when he retires? Explain your answer.
96 THE WORLD OF WORK FURTHER YOUR KNOWLEDGE
Question 2 SELF-EMPLOYMENT Many public-sector pension employee contribution rates are staggered so that those on the lowest salaries Self-employed people pay Income Tax on their pay the least amount and those who earn the most, business’s profits, rather than the total amount of pay more. The following information shows the pension income earned. To calculate profit, the business owner contributions made in the Fire Service if a firefighter must subtract the business expenses from the business joined the pension scheme after 2015. income. The formula for profit is: Income – Expenses = Profit or Loss Employee contribution rates For example, if a business sold 10 pens for £2 each the income would be £20. If it cost the business owner FIREFIGHTERS’ PENSION PENSIONABLE PAY £8 to buy the pens, the business profits would be £12. SCHEME (2015) Because there is no employer to take the Income Tax, Up to £27,818 11.0% self-employed people must submit a self-assessment form every year to HMRC. The business owner will £27,819-£51,515 12.9% indicate on their self-assessment form how much income they earned during the 12-month period and £51,516-£142,500 13.5% how much they spent on expenses. Whatever the difference, will be the amount that is taxed. £142,501 or more 14.5% For example, Amira earned £29,362 as a self- employed caterer providing food for private parties Employer contribution rates – 14.3% during the last tax year and spent £16,019 on expenses (ingredients, utensils, etc.). This means she Source: Firefighters’ Pensions England made £13,343 profit. £29,362 - £16,019 = £13,343 profit 1. Calculate the employee and employer contributions Just like employees, Amira also gets a personal tax per year if a firefighter earned a salary of allowance of £11,850 so she will only pay tax on the a) £16,120 remaining £1,493. This will be charged at 20% so her tax bill will be £298.60. b) £32,500 c) £68,750 b) In pairs, look at the range of employee contributions PROFIT (£) TAX RATE (%) TAX PAID (£) for firefighters in the table above. In your opinion do you think these are fair? Justify your answer. 11,850 0 0
1,493 20 298.60
97 THE WORLD OF WORK FURTHER YOUR KNOWLEDGE
When it comes to paying Income Tax on business profits, the same tax bands apply as those of an employee. Alba, the self-employed plumber, has calculated the number of hours she has worked for each of the past 6 months and how much she spent on expenses (supplies, petrol, phone bills, etc).
INCOME MONTH HOURS WORKED EXPENSES (£) PROFIT/LOSS (£30 PER HOUR)
April 168 927
May 195 1,621
June 110 782
July 72 437
August 46 210
September 197 2,932
TOTAL a) Complete the table above and calculate Alba’s profit over these 6 months b) Calculate her Income Tax payment for the 6 months from April to September
98 RISK AND REWARD
RISK AND REWARD WHY DO SOME PEOPLE TAKE RISKS WITH MONEY?
In this chapter you will explore what is meant by financial risk and reward.
You will think about the financial decisions you could be faced with, and the level of risk involved in these.
You’ll explore the reasons that people take risks with money, and the link between risk and reward.
You will also find out how you can protect yourself against financial risks and where you can go to get help if the risk you have taken turns out to be a bad decision.
DID YOU KNOW?
Risk taking causes changes in the brain as it releases adrenaline, causing an intense feeling of pleasure. This is why some risk taking, like gambling, can become addictive.
99 RISK AND REWARD TYPES OF PERSONAL FINANCIAL RISK
TYPES OF PERSONAL FINANCIAL RISK
In order to gain financial rewards, there is often some element of risk involved – the outcome of a financial decision may not be certain or guaranteed. There could be the possibility of a significant financial gain, but there could also be the risk of no gain or even a loss, leaving you worse off than when you started.
There are a number of different types of personal financial risks, these include:
RISKS ASSOCIATED RISKS ASSOCIATED WITH YOUR INCOME WITH YOUR SPENDING AND BORROWING For most people, their most valuable asset is their ability to earn an income. Unfortunately, there are These risks can arise for a number of reasons. risks that could affect your ability to earn income. You could be spending more than you are earning. For example: This could be because you are simply not earning • You may become ill, injured or disabled and enough to meet the basic needs of you and your unable to work family. But, it could be because you want to buy things that give you the lifestyle that you aspire to • You may lose your job and become unemployed but cannot afford.
• When you retire your income from work stops. When you overspend, for whatever reason, you may decide to take the risk of borrowing money to In the case of any of these happening there will fund this spending. This can result in unaffordable be consequences, not just for you, but also for any interest payments leading to a growing level of debt family members that rely on you to maintain a (see the ‘Borrowing’ chapter). certain level of income.
100 RISK AND REWARD TYPES OF PERSONAL FINANCIAL RISK
RISK THAT YOU MIGHT LOSE ASSETS QUESTIONS If something you own is stolen or damaged it may need to be replaced, or maybe you damage 1. What could be the three most something belonging to someone else and have valuable assets someone might own to pay for the repairs. The more expensive the item, in their lifetime? the greater the financial risk to you if it is damaged 2. Name three risks that could affect your or stolen. ability to earn an income. 3. Explain how investing is different RISKS ASSOCIATED to saving. WITH INVESTING
To invest is to use your money to buy something that has the potential to grow in value. There is an element of risk with investments as there is no guarantee that what you have invested in will increase in value – in some cases it could even decrease in value, meaning you could lose money.
What people choose to invest in often depends on their attitude to risk. Some choose not to invest at all, some take very low risks and others may make a higher risk investment.
CASE STUDY
Simone has met her friend Mei for a coffee. She is Simone gives Mei the news that she has recently happy to order and get a table if Mei doesn’t mind passed her driving test and is about to get a loan going to the cash machine for her to get some from the bank to buy a second hand car from a cash out. She gives Mei her debit card along with friend of a friend. her PIN, which Mei puts into her phone notes so 1. Identify the financial risks that Mei and Simone that she can remember it. are taking. Over coffee, Mei tells Simone that she is planning 2. Decide whether each risk is a low, medium or to go on holiday soon and has seen a really great high-risk activity. deal on an online travel agency. She has never heard of the agency, but the holiday is much 3. Discuss the implications of each risk and decide cheaper than anywhere else she has seen it. While how Mei and Simone could minimise each one. she has no savings at the moment, Mei is planning on getting herself a credit card to book the holiday.
101 RISK AND REWARD ATTITUDES TO RISK
ACTIVITY
Different people have different attitudes to risk. Working with a partner, look at the 10 activities listed in the table below and rank them from 1 to 10.
1 = the activity you consider to be the least risky
10 = the activity you consider to be the most risky
As you rank them, discuss what risks might be related to each of them. When finished, compare your ranking order – are they the same? Why might there be differences of opinion?
YOUR RISK PARTNER’S RISK ACTIVITY RANKING (1-10) RANKING(1-10)
Crossing a very busy dual carriageway
Sleepover at a friend’s house
Getting a lift in a friend’s car
Smoking cigarettes
Going to watch a Premier League football match
Playing games on a computer
Watching TV
Riding a bike without a crash helmet
Sky diving
Walking down a flight of stairs
DID YOU KNOW?
If you are looking to borrow money the lender will assess the level of risk you present to them. Customers who are lower risk will often be able to borrow money at lower interest rates than those who are considered a higher risk.
102 RISK AND REWARD ASSESSING RISK
ACTIVITY
When will you have to assess the risk of financial decisions?
Draw a timeline from the age of 14 to 30. Place the following financial decisions on that timeline for when you think you might have to make them independently:
• Owning a car
• Choosing a savings account
• Paying for a holiday with friends
• Owning a pet
• Borrowing some money
• Starting to pay rent for accommodation.
Add two more of your own to the timeline.
103 RISK AND REWARD INVESTMENTS INVESTMENTS
All investments have the potential to grow in value, but they can also decrease in value, meaning you begin to lose money. This is different to a savings account, where your money is protected, and grows according to the interest rate you receive.
Some common forms of investment include:
SHARES COLLECTIVE INVESTMENTS A share is a unit of ownership in a company; if you buy a share in a company then you own part of it. Many investors are not experts in investing. They may Companies raise the money that they need in order also be worried about taking a risk by investing too to operate and grow by selling shares. If a company much of their money into one or just a few companies, performs well its share value will rise and any shares which could perform badly and see their share price you have in that company will increase in value. You fall. One option is to invest in a unit trust which is could then sell them at a profit. For example, you buy run by people who are experts. These trusts may well 100 shares at £1 per share therefore spending £100. invest in shares and commodities (such as property After 3 years you decide to sell them all as they are and gold) in order to spread the risk for an investor. now worth £2 per share, meaning that you will receive The combination of the different areas of investment is £200 for your 100 shares, making a profit of £100. known as the portfolio. Even if one area of the portfolio However, shares can also go down in value if a begins to fall in value, this may not impact the unit trust company does not do as well as expected and share too much and may be balanced by growth in other prices can vary greatly from day to day. For example, areas of the portfolio. Even so it’s important to realise the 100 shares that you bought at £1 per share are that collective investments can still fall in value. now valued at 80p per share, meaning that if you sold all of your shares you would only receive £80, making PROPERTY AND a loss of £20. OTHER COMMODITIES If you own shares you may also receive income from dividends, which are a portion of the company’s profits Some people prefer to invest in actual products like paid out to shareholders. gold and houses. As with shares, the value of these can go down as well as up. For example, you buy a This type of investment carries more risk than collective house worth £100,000 but in 12 months the house investments (see below) and is considered to be a is revalued at £98,000 meaning that you have lost longer-term investment. £2,000 off the value of the property and the amount More information on buying shares can be you paid for it. Five years later, the house is revalued found in the ‘Further your knowledge’ section. again and is now worth £115,000, meaning that if you were to sell you could make £15,000 profit. One issue with these is that they can be difficult to sell quickly, so are not good if you might need your money in a hurry.
104 RISK AND REWARD INVESTMENTS
ART, ANTIQUES, WINE AND CLASSIC CARS
Not the most conventional way to invest but, provided you know the market, they can provide a good return on your investment. For example, an art collector bought a painting in 2011 for £500, and six years later it was sold at auction for nearly £8,000. However, these types of investments can be very risky and also fall in value, particularly if they go out of fashion.
DID YOU KNOW? QUESTIONS
Some investors do not want to put money 1. Explain why some people decide to take into certain types of business for ethical the risk of investing, instead of keeping reasons. You can now invest in “ethical” all their money in a savings account. funds. These will avoid investing in 2. How do collective investments attempt companies involved in, say, making to reduce risk for investors? cigarettes, alcohol, weapons or nuclear 3. What are some of the risks associated products. Others invest in companies with investing in property? that are developing renewable energy techniques or recycling. There are even 4. When there is a lot of change in financial funds that invest in vegan companies, markets investment in commodities, which avoid anything to do with meat such as gold, tends to increase. Why or animal products. do you think this is?
ACTIVITY
Consider the following four people. Who, if anyone, do you think should be considering investing some of their money? Give reasons for your answer.
1. A 25-year-old single man who does not earn much but sometimes has a little money left over at the end of each month. This amount is never the same, varying between £10 and £60. He already has a pension scheme through his job and cannot afford to pay a mortgage to buy his own house yet.
2. A couple, both 45, in well paid jobs whose two children are both planning to go to university. They have about £1,000 spare at the end of each month and want to build up a fund for when they retire but also don’t want their children to build up too much debt when they go to university.
3. A husband and wife, both 55 years’ old, who have just won £50,000 on the lottery. They have no children and really want to travel the world.
4. An 80-year-old woman who already has some money saved in a building society for emergencies. She gets the state pension and has paid off her mortgage. She has no family to worry about and has £10,000 to spare.
105 RISK AND REWARD GAMBLING
GAMBLING
Gambling is an activity that results in either a win or a loss. It is also known as betting, gaming or taking part in a lottery. All gambling is high risk – the chances of losing money are far greater than winning it. This is how organisations in the gambling industry make their money.
Those who gamble must be prepared for the fact that in most cases they will lose their money.
There are a number of sectors where gambling activities take place:
• Arcades (those for adults and those for families) • Betting (online, at an event or in a High Street bookmakers) DID YOU KNOW? • Bingo (online or in a bingo hall) The most common form of gambling in • Casino (online or in a casino) the UK is the National Lottery, with 30% of people over 18 taking part. This is despite • Lotteries (raffles, tombolas, sweepstakes, etc.) the chance of winning the jackpot being • Gaming machines (fruit machines, fixed odds around 1 in 14 million! betting terminals, etc. – these can be found in pubs, betting shops and casinos) Source: Gambling Commission Survey 2016 • Social gambling (groups of friends playing cards or dice for money at home).
106 RISK AND REWARD GAMBLING
CASE STUDY
Max has received £50 birthday money and wants Max’s mum was annoyed that he had wasted his to spend it on in-game purchases for his favourite birthday money and told him that he shouldn’t be computer football game. gambling on mystery bundles.
He plans to buy one of the named top players In pairs, discuss the following: for £10 but then sees an offer to buy a mystery 1. In your opinion, do you think this is a form bundle containing three random players for the of gambling? Explain your answer. same price. 2. What are the potential risks for young people He decides to buy the bundle as he thinks there playing for mystery bundles? is a chance he might get three top players for the price of one but is disappointed when he doesn’t. 3. Do you think that Max will be more or less likely to gamble in the future based on this outcome? Max decides to spend the rest of his birthday money on four more mystery bundles, as he thinks 4. If Max had got eight top players in his mystery they will have to contain more of the top players, bundles, do you think that he would be more or but is even more disappointed when, for £50, he less likely to gamble in the future? only gets one of the players he wanted. 5. Are there any similarities between these mystery To make it worse, his friend got three top players bundles and other forms of gambling? Explain in just one bundle. your answer.
CRYPTOCURRENCY
Cryptocurrency is a virtual or digital currency produced by a public network, rather than any government, that uses cryptography to make sure payments are sent and received safely. It can be used to buy products and services but is generally not accepted in shops. One well known cryptocurrency is Bitcoin.
Cryptocurrencies are stored in a digital wallet on a phone or computer and can be transferred electronically between people’s wallets. The value of cryptocurrency is very volatile and should be treated as a high-risk investment as it is not regulated by the government or the finance industry.
107 RISK AND REWARD TAKING FINANCIAL RISKS
CASE STUDY
Sandeep and Noor have been together for 5 years and have saved up £5,000. At the moment, it is earning 0.5% interest per year in a savings account. They want to move this money into something that gives a better return, so are considering three options:
Option A Option C Buying shares in four of the biggest companies selling Buy some cryptocurrency, which rose in value by shares on the London Stock Exchange. They know over 480% last year. They don’t know much about that in the last 2 years these share prices rose by an cryptocurrencies but regularly hear about them in average of over 10%. the news.
Option B 1. Which option would you advise Sandeep and Put it into a fixed rate savings account that guarantees Noor to choose? a return of 2% interest over 2 years. There is no 2. Are there additional questions you would like risk of losing money, but they would not be able to to ask Sandeep and Noor? access their money for the 2 years, and if interest 3. Could you suggest any alternative solutions rates increased they would not be able to benefit by for them? moving their money to a different savings product. You can find out more about Sandeep
and Noor’s choices in the ‘Further your knowledge’ section.
OTHER REWARDS
People take risks with their money because there is the chance of a financial reward but there may be other reasons why people choose to take risks. These include:
1. Improved lifestyle – For most people, the 3. Moral satisfaction – Investors who choose ethical reason for investing is to increase their income. investments may well accept a lower financial reward This increased income then enables them to improve compared to other non-ethical investments. This their lifestyle. is because they like the moral benefits of knowing that they have helped companies whose aims and 2. Personal satisfaction – While many people objectives they support. rely on a qualified financial adviser to pick the right investments, some people enjoy the challenge of trying to pick the right investments. They may enjoy keeping a check on how the share prices are changing and how this affects the value of their investments.
108 RISK AND REWARD TAKING FINANCIAL RISKS POTENTIAL NEGATIVE CONSEQUENCES OF TAKING FINANCIAL RISKS
Taking a risk means that the outcome is uncertain and could be positive or negative. The consequences of a financial risk ending negatively could be:
HEALTH AND BANKRUPTCY MENTAL WELLBEING If you lose so much of your money that you do not The potential losses from taking a financial risk can have enough to make payments for current debts there cause worry and stress which can have a serious effect is a chance that you could be declared bankrupt. If this on your health. This may lead to days off work and happens you may have to sell your home and other could affect your behaviour towards family and friends. personal possessions. It could stop you from working A survey carried out by the Money and Mental Health in certain occupations and you will find it much harder Policy Institute found that people with problem debt are to borrow money in the future. twice as likely to develop major depression as those not in financial difficulty. LIFESTYLE
CREDIT HISTORY Just as improved lifestyle is one of the potential rewards of taking financial risks, if the risk goes wrong then Losing money, for example through bad investments lifestyle may well suffer. It could mean you have less or gambling, may impact on your ability to pay your money to buy the things that you want to have. bills or keep to contracts that you have agreed to (e.g. mobile phone). If you miss one or more payments this will be reflected on your credit history, which could make it harder for you to borrow money if you need to in the future. QUESTIONS
1. Explain why investing in cryptocurrencies may be seen as a risk. 2. Other than financial, what reward are ethical investors receiving? 3. Write a sentence which describes the relationship between financial risk and reward.
109 RISK AND REWARD PROTECTING YOURSELF HOW TO PROTECT YOURSELF AGAINST FINANCIAL RISK
There are steps you can take to reduce the level of risk you take with your money.
UNDERSTANDING PREPARATION YOUR ATTITUDE TO RISK AND RESEARCH
If you are planning to take a financial risk it is When deciding whether to make an investment you important to think about your own attitude to risk. can reduce some of the risk by making sure you have Are you the sort of person who likes to take a risk talked to experts, such as a financial advisor or your and would not worry if things started to go wrong? bank. They can advise you of the risks involved in any Or, are you the type of person who would worry and investment and should discuss your attitude to risk as be stressed about losing money, so may want to take well. You should do research yourself and seek different lower risk options? You will also need to look at your opinions before consulting an adviser. budget and consider how much money you can afford to put at risk. SPREAD THE RISKS
BUDGETING If you do get advice they will almost certainly advise AND PLANNING you to “spread your risks”. This means do not rely on just one type of financial investment. If possible, have A budget looks at what you are earning as income your money invested in a range of assets, so that if and compares that to what you are spending. This something goes wrong with one of them you still have provides a snapshot of whether you have any money the others to fall back on. left at the end of the month. If not, you may be able to reduce your spending or increase your income. If INSURANCE you do have money leftover you can begin considering whether this should be saved or invested. Having Insurance is a way to protect yourself against the a budget allows you to see all of your day-to-day financial loss of something going wrong, for example, finances in one place, so you can make more informed losing your income because you have fallen ill, choices around saving and investing depending upon breaking your mobile phone or having an accident in your financial circumstances. your car. We can’t stop events like these occurring, but insurance is a way to protect yourself from financial HOW losses if they do occur. INSURANCE WORKS
Insurance is when a company undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium. The premium is the amount of money you pay the insurance company for the insurance.
110 RISK AND REWARD PROTECTING YOURSELF
As an example, let’s say you are going on holiday abroad. Step 1 – Get all your travel and personal details together – where you are going, where you are flying from, how long for, what you intend to do when you are there and how much insurance cover you will want. This is how much you would need to claim back if you missed your flight, your luggage was lost, you had your ACTIVITY possessions stolen when on holiday, or if you had to get medical treatment. “Spread the risks” is a common bit of financial Step 2 – Shop around different insurance companies, advice yet there are many other sayings out possibly using a comparison site to find a policy that there that try and impart some form of financial meets your needs. wisdom. Here are 10 of them – what do you think Step 3 – Pay the premium to the insurance company. they mean in the context of taking financial risk? This will vary depending on how much cover you • Success and failure are two sides of want – the more you ask to be covered the more you the same coin will pay. In 2018, a typical policy for 2 weeks in Spain • All that glitters is not gold would have cost you approximately £25. • Don’t throw good money after bad Step 4 – The insurance company will send you your • Money can’t buy happiness policy details, together with contact numbers in the event that something happens while you are on holiday. • Keep the wolf from the door • Don’t put all your eggs in one basket Step 5 • There’s no such thing as a free lunch a) Go on holiday, have a good time and return home • A debt paid is a friend kept with no reason to contact the insurance company. You don’t get your premium back if you don’t claim • Make ends meet though, that now belongs to the insurance company. • Take care of the pennies and the pounds Or will take care of themselves. b) When you are away you are pickpocketed and have money and jewellery stolen to the value of £1,000. If anything like this happens you must contact the insurance company straightaway using the contact numbers they provided when you got your policy details. Eventually, you will fill in a claim form and QUESTIONS the insurance company will pay you £1,000 to 1. Name three ways to protect yourself compensate for the stolen money and jewellery against financial risk. (or close to the £1000 if your policy has an ‘excess’ – this is explained later on). This example shows that 2. What are the benefits of budgeting? insurance is a way of protecting yourself against the 3. Name two organisations that offer unexpected. Most people will pay for insurance and financial advice. never have to use it. But, for those occasions when 4. What is the purpose of insurance? something bad does happen, insurance provides the guarantee that you will not lose out financially.
111 RISK AND REWARD TYPES OF INSURANCE
TYPES OF INSURANCE
You can buy insurance for all sorts of situations – your house, your health, your holiday, your pet, and your possessions. Most insurance is voluntary, and you can decide whether you want to take out insurance for something or take a risk in the hope that nothing bad will happen. However, some insurance is a legal requirement. By law, if you own a vehicle that can be safely driven on the road you must have insurance to, at the very least, cover you for any damage or harm you might do to other drivers or pedestrians – this is called third party insurance. There are also some types of insurance that you must have if you run your own business. Here are some typical examples of insurance and what they will cover.
TYPE OF INSURANCE WHAT IS LIKELY TO BE COVERED
Covers repairs to the structure of your home in case of damage – e.g. from Home buildings insurance a storm.
Home contents insurance Covers your possessions in the home against loss or damage.
Your insurance will pay the costs if you do damage to someone else or their Motor insurance – third party property (i.e. a third party).
As third party, but in addition the policyholder’s own vehicle is covered if it is Motor insurance – third party, fire and theft stolen or catches fire.
This covers the cost of damage to yourself and your own vehicle as well as Motor insurance – fully comprehensive any damage you may cause to someone else or their property.
Will pay money on your death, or in some cases if you become critically ill while you are covered. Life insurance Life insurance is often taken out to cover a mortgage, so that if you die during the mortgage term the loan will be paid off.
Covers medical expenses if you are ill – you may be able to use private Health insurance health care.
Cover for loss of luggage, travel cancellations or disruptions, if you have to Travel insurance pay medical expenses because you fall ill on holiday, etc.
If you take out a loan you can insure yourself in case you cannot repay it due Loan cover to illness, unemployment, etc.
Income protection Guarantees you some income if for any reason you are unable to work.
Will cover for vet fees if your pet needs an operation or other Pet insurance medical treatment.
112 RISK AND REWARD TYPES OF INSURANCE
Bear in mind that some insurance policies also require you to pay an agreed amount of the cost of any damage if you make a claim – known as the excess. The insurer DID YOU KNOW? will then pay for anything more than this. Agreeing to a 20% of all households in the UK have higher excess generally reduces premiums. no buildings or contents insurance. Self-insuring Source: media.shelter.org.uk October 2017 Some people choose not to buy insurance if they consider the risk of something going wrong to be small. Self-insuring means having enough money saved, or saving an amount each month, which will be used to INSURANCE POLICIES cover the loss of income or property if you lose your job, or covers the cost of replacing something you own if it When taking out insurance you must make sure that it breaks or is stolen. is the right policy for your circumstances, and that you will be covered if something were to go wrong.
As with any financial product, insurance policies will ACTIVITY have full terms and conditions that detail what they will and won’t pay out for and it is important to check these thoroughly to ensure that the policy is suitable for you. Andrei has recently bought a rescue dog called Casper from a local animal charity. Casper has Not all insurance is a good idea. Banks sold Payment been checked by a vet and he is fit and healthy Protection Insurance (PPI) alongside loans and credit to go to his new forever home with Andrei. cards for years, supposedly to cover repayments if you lost your job or were sick. And while not always a Andrei decides not to buy pet insurance, bad idea, it wasn’t suitable for most people and was which costs £35 per month. Instead, Andrei actually very expensive. So much so that over £30 will self-insure and pay for Casper’s vet bills by billion has been repaid to customers in a huge mis- saving £15 a month, which he thinks will cover selling scandal. the cost of any treatments Casper might need. Insurance companies often come up with new things In the first year, Casper only requires his annual that you can insure yourself against, even where the injections, costing Andrei £80. risk is minimal. So always examine the risk, work out 1. What are the risks for Andrei by self-insuring? whether you need the protection, or if you’re protected in other ways (through other insurance you may already 2. By not choosing insurance, how much has have), before signing up to new insurance policies. Andrei saved over the first year?
3. How long would it have taken Andrei to save up for the annual injections?
4. In your opinion, was Andrei right to self-insure?
5. Think of three questions you should ask yourself before you decide to self-insure.
113 RISK AND REWARD TYPES OF INSURANCE
DISCUSSION
Does it pay to be loyal? Owen has been a loyal customer, automatically Chris has just joined the same insurance company. renewing his car insurance every year and never His circumstances are identical to Owen’s and they querying price increases. He believes that because drive similar cars. he has insured his car with the same company Who do you think gets the cheaper insurance? every year, he will be getting the best deal. Explain your answer.
DID YOU KNOW? CASE STUDY
Real Madrid Football Club insured Cristiano Emil loves gadgets and always likes to have Ronaldo’s legs for £90 million. the latest technology for his phone and flat. He Source: www.telegraph.co.uk queued up to get the latest smartprhone and uses it all the time for photos, music streaming, maintaining his social media and staying in ACTIVITY touch with his friends and family. He has the very best 4K UHD TV and the lighting and heating Research other things that famous people have in his flat is voice controlled. He has fitted insured themselves for. security cameras that can send an image to his smartphone if an intruder is detected. He cannot afford to buy and run a car but, as he lives in a town, he uses his e-bike a lot and now wants to ACTIVITY upgrade it. He is considering taking out a loan to pay for the latest model. In pairs or small groups, draw three spidergrams Aliyah loves travelling and participating in – one each for a house, car and holiday. Try to adventure sports like mountain biking and work out the risks attached to each and write white-water rafting. Originally from Sweden, she them onto the spidergram. When complete, is also an accomplished skier and snowboarder. consider these questions: She rents a flat, but it is often empty whilst she • What is the likelihood of them happening? travels. When she is travelling in the UK, Aliyah takes Rufus, her beloved 12-year-old collie, but • How disastrous, upsetting or expensive might when she goes abroad she pays friends to look they be if they happened? after him. To get around in the UK, Aliyah has a • Would you consider taking out insurance for 20-year-old campervan that she calls Hector. any of these risks? Can you advise Emil and Aliyah on insurance? • Other than these three things, what else do you Recommend two types of insurance that you feel think you might have to take out insurance for? are important to Emil and two for Aliyah.
114 RISK AND REWARD PROTECTION AGAINST FINANCIAL RISK
DID YOU KNOW?
The record pay-out by an insurance company in the UK to repair a car was in 2011 when the actor Rowan Atkinson (who plays Mr Bean) crashed his McLaren F1 into a hedge. It cost the insurance company £910,000. Mr Atkinson sold the car four years later for nearly £7.5 million more than he paid for it!
Source: www.mirror.co.uk
OTHER FORMS OF PROTECTION AGAINST FINANCIAL RISK
INDUSTRY REGULATORS
If you, as an individual, have a complaint about a The Gambling Commission was set up under the financial business the first thing to do would be to talk Gambling Act 2005 to regulate commercial gambling to the business and give them a chance to put things in Great Britain. Their objectives are to: right. If, after receiving their final response (usually • Prevent gambling from being a source of crime or within 8 weeks), you are still unhappy that would be the disorder, being associated with crime or disorder, point to contact the Financial Ombudsman Service. or being used to support crime The Financial Ombudsman Service was set up by • Ensure that gambling is conducted in a fair and parliament to resolve individual complaints between open way financial businesses and their customers. They can look into problems involving most types of money matters – • Protect children and other vulnerable people from from payday loans to pensions, pet insurance to advice being harmed or exploited by gambling. on buying shares. If they decide someone’s been treated unfairly, they have legal powers to put things right. Like the FCA, they do not deal with individual complaints – they regulate the industry. If you had a The financial services industry is regulated by an complaint about a gambling business, you would talk independent body called the Financial Conduct to the business to try and get the problem resolved. Authority (FCA). Any business or individual who If this did not work to your satisfaction you could then wants to offer financial services to the public must be contact the Independent Betting Adjudication Service authorised by the FCA. If the FCA believes someone (IBAS). IBAS was founded in 1998 and is a third-party is misleading the public, for example, through false organisation that settles disputes between gambling claims made in adverts, then it can investigate an establishments registered with IBAS and their customers organisation or individual, fine them and impose in the United Kingdom. a ban on their activities.
115 RISK AND REWARD PROTECTION AGAINST FINANCIAL RISK
STATUTORY RIGHTS
In addition to the industry regulators, consumers are also protected by certain laws.
The Consumer Credit Act 2006 – This act gives Financial Services Compensation Scheme (FSCS) – protection to consumers when they are borrowing This was set up in 2001 and is free to customers of UK money. The Act lays down rules covering: the form and registered financial institutions. It protects your money content of credit agreements and credit advertising, should anything happen to your bank, building society the method of calculating the Annual Percentage Rate or credit union. The maximum amount is £85,000 per (APR) of the total charge for credit and the procedures financial institution (or £170,000 for a joint account). to be adopted in the event of default, termination or So, let’s say for example you have savings of £100,000 early settlement. This is also the Act that set up the in a particular bank. That bank then gets into Financial Ombudsman Service. difficulties and eventually goes bust. Under the FSCS you are guaranteed to get £85,000 of your savings Advertising Standards Authority (ASA) – The ASA is returned to you. As there is a maximum amount that the UK’s independent regulator of advertising across all can be compensated it makes sense for people with media. If you feel an advert about a particular financial larger savings to spread them around so that they do service is misleading or incorrect you can complain to not have too much money tied up in one particular the ASA who will then investigate the matter. organisation.
QUESTIONS
1. What is the role of the Financial Conduct Authority (FCA)? 2. If you had a complaint about a personal loan, who could you contact for help? 3. What is the purpose of the Gambling Commission? 4. What is the name of the organisation that regulates the media? 5. What is the total amount of savings that are protected under the Financial Services Compensation Scheme (FSCS)?
116 RISK AND REWARD WHAT HAVE YOU LEARNT?
WHAT HAVE YOU LEARNT?
Using the knowledge you have learnt from the previous pages in this chapter, complete the activity and case study below:
ACTIVITY
Look at the following scenarios and decide a possible risk and reward for each.
SCENARIO POSSIBLE RISK POSSIBLE REWARD
Buying shares
Playing games in an online casino
Buying cryptocurrency
Not taking out an insurance policy for a new phone
Buying an antique watch
CASE STUDY
Jodie works as an aerospace engineer testing aircraft. After her monthly expenses and putting some money into savings, she still has around £150 left at the end of each month.
Jodie does like to take calculated risks. She is not 1. Is Jodie currently facing any possible irresponsible and accepts that there are risks that financial risks? come with looking for greater financial rewards. 2. Explain what Jodie means when she says For example, Jodie only has car insurance, and for she is “considering the balance between risk everything else she self-insures (puts money aside and reward”. each month to cover anything unexpected). 3. Suggest some ways in which Jodie might chose She has never invested money before but is now to invest her £150, and explain the risks and considering her options and the balance between rewards associated with each. risk and reward that she is willing to take. 4. What would you do if you were in Jodie’s position?
117 RISK AND REWARD FURTHER YOUR KNOWLEDGE FURTHER YOUR KNOWLEDGE
BUYING SHARES
When you buy shares in a company, you will usually pay tax. If you buy the shares online, you will pay Stamp Duty Reserve Tax (SDRT) and you will be charged 0.5% on top of what you have paid for the shares. For example, if you pay £2,000 for your shares, your SDRT payment will be £10.
If you buy shares through a stock transfer form (i.e. paper-based shares) you will pay SDRT charged at 0.5%, if the value of the shares you are buying is greater than £1,000. This is then rounded up to the nearest £5. For example, if you buy shares using a SELLING SHARES stock transfer form to the value of £2,995 you will pay £15 SDRT. If the profit you make when you sell your shares is greater than £11,700 (2018/19) in one financial year you will pay Capital Gains Tax, but only on any gain over this amount. If you are a basic rate taxpayer, you will pay 10% and if you are a higher rate taxpayer then you will pay 20%.
Look at the following scenarios and for each one:
a) Identify which tax the investor will pay
b) Calculate how much tax the investor will pay.
1. Danah purchases £11,800 of shares using the internet. After 3 years, Danah’s shares are now worth £23,650 and she has decided to sell them. Danah is a basic rate taxpayer.
2. Emily pays £4,250 for some shares using a stock transfer form.
3. Juan paid £6,750 for his shares a year ago and they are now worth £8,320. He is planning to sell his shares and he is a higher rate taxpayer.
4. Oliver buys shares valued at £7,800 for £6,100 using an online bank.
118 RISK AND REWARD FURTHER YOUR KNOWLEDGE
INSURANCE
Joel has recently bought a new phone on contract In pairs, answer the following questions: costing him £60 per month for 2 years – the £60 1. If Joel had decided to purchase the insurance, how includes a monthly payment for the phone itself, much would the phone and insurance have cost him plus a monthly data, calls and texts package. The for the 2-year contract? shop where he buys the phone from suggest that he considers taking out a mobile phone insurance policy, 2. Joel decides to replace his phone with the same at an additional cost of £100 per year, with an excess model and learning from this mistake, he decides he payment of £100 if he loses or damages it. will also take out mobile phone insurance to prevent any future possible damages or theft. How much has Joel decides not to buy the insurance. A week after this whole experience cost him? his purchase, disaster strikes, and he drops his phone and it no longer works. He takes it back to the shop 3. In your opinion, do you believe this insurance policy where they discover that it is beyond repair and there to be money well spent? Explain your reasons. is nothing they can do to fix it. 4. In the UK, approximately 82% of adults have If he wants to replace his phone with the same model, a smartphone while only 20% of adults have it will set him back £1,000 just for the handset and, mobile phone insurance. whatever he decides to do, he will still have to pay £60 a month for the original contract even though Why do you think this figure is so low? he no longer has the original phone – although he (Source: http://www.assurantsolutions.co.uk/ will be able to use the data, calls and texts with a connected-insight/mobile-phone-insurance- new handset. insight-report-2015/)
119 RISK AND REWARD FURTHER YOUR KNOWLEDGE
INVESTING IN SHARES
Sandeep and Noor decide to risk some of their savings on the stock market, buying shares in a variety of different UK companies to try to make a profit on their investments. They track their investments weekly using the ondonL Stock Exchange website to see how they are performing in the table below:
NO. OF SHARES PRICE BOUGHT TODAY’S VALUE OWNED BY VALUE OF PRICE TODAY COMPANY NAME PER SHARE OF INVESTMENT SANDEEP AND INVESTMENT (£) (IN P) (IN P) (£) NOOR
The Blue Company 2500 6p 7p
YellowSquare 48 725p 722p
Green Edit PLC 150 140p 139p
Red-Champ 500 58p 56p
TOTAL
1. Create an investment tracker for Sandeep and Noor like the above example.
2. Which company shares are most profitable? And by how much?
3. How much profit or loss have Sandeep and Noor made in total from when they purchased the shares?
4. If the price of YellowSquare shares falls by 10% and the price of Green Edit PLC shares increase by 15%. What is the value of their investment portfolio now?
5. What risks are involved when investing in shares?
6. Imagine you have £1,000 to invest in shares. Undertake your own virtual share challenge; choose some companies on the London Stock Exchange and track your shares once a week for 4 weeks and see how much you could have made (or not!).
120 SECURITY AND FRAUD
SECURITY AND FRAUD WHY SHOULD I KEEP INFORMATION ABOUT MYSELF SECURE?
In this chapter you will explore what is meant by identity theft and fraud.
You will see how identity theft can happen and how information about your identity may be fraudulently used by people who are trying to make money by breaking the law. You will also discover what to do if someone steals your identity, plus look at some of the ways you can protect yourself against identity theft.
DID YOU KNOW?
In the UK in 2017; • Almost 175,000 case of identity fraud were recorded • Nearly 25,000 victims of fraud were under the age of 30 • 84% of identity frauds were committed online • The biggest percentage increase in victims of fraud were under 21. Source: Cifas
121 SECURITY AND FRAUD WHAT IS FRAUD?
WHAT IS FRAUD?
Fraud involves a person dishonestly and deliberately deceiving a victim for personal gain of property or money. In the UK, the first laws on fraud were set out in the First Statute of Westminster in 1275. So, fraud is not a new offence but methods of committing it have greatly evolved in recent times with the rise of new technology. In particular, the internet has provided increased opportunities for fraudsters to commit crime on a very large scale.
What is identity theft?
Identity theft is one common type of fraud; it is the act of a person illegally obtaining information about someone else. Thieves might try to find out the following types of personal information: full name, maiden name (the original surname of a person if they decided to change it when they got married), address, date of birth, National Insurance number, phone number, email address, passwords, bank details and debit or credit card numbers.
Identity theft is not a new crime; here are some historic examples:
The book of Genesis in the Bible tells the story of Jacob and Esau, which is considered During the American Wild West era, by many to be the first documented act of in the late 19th century, outlaws would identity theft. Jacob posed as his older brother murder people to acquire a new name Esau in the hope of tricking his dying father and life story. This false identity helped into believing he was the older son so that he the outlaws to stay one step ahead of would inherit his father’s estate when he died. the law. In 1925, Victor Lustig posed as the deputy director general of the Ministry of Posts and In the 1960s, Frank Abagnale Jr. Telegraphs in Paris. He met with a group of assumed a number of identities, scrap dealers and offered them the chance including an aircraft pilot and a to buy the Eiffel Tower. One of the scrap doctor. Before he reached his 19th dealers fell for the con and Lustig escaped birthday he obtained more than with their money. He was eventually caught $2 million through fraud. Aged 21, he and sentenced to 20 years in Alcatraz was sentenced to 12 years in a federal (a notorious American prison). prison for multiple counts of forgery. His story was made into a 2002 film In 2006, the UK government became so called Catch Me If You Can starring concerned about the rise in identity theft that Leonardo DiCaprio and Tom Hanks. it announced plans for everyone in the UK to carry an ID card. However, these plans were scrapped in 2010 following concerns about the cost of the scheme and how effective it QUESTIONS? would be. There were also worries over how much personal data would be collected, how 1. What type of personal information it would be stored and how it would be used. could be taken during identify theft? 2. Why has the internet increased the risk of identity theft? 3. What could fraudsters do with the identities they take?
122 SECURITY AND FRAUD IDENTITY THEFT
WHAT ARE THE DIFFERENT METHODS USED TO CARRY OUT IDENTITY THEFT?
Physical Digital
Bank card skimming – This usually occurs when Hacking – Hacking occurs when criminals successfully someone, for example a shop assistant or waiter, gets guess or decipher your passwords, security questions, your information by “skimming” or copying your debit and/or Personal Identification Numbers (PINs). or credit card information when you make a purchase. They can then access any accounts you have. Many They often then sell the information to professional hackers use social networking sites like Facebook to criminal gangs. This can also be done when a special get information about you that can be used to answer storage device is attached to an ATM or cash machine. security questions. Some hackers will break into a The device reads the magnetic strip on your card which company website and steal the company identity. This thieves use to commit fraud. means you could order goods from a website that you think is genuine, but they simply take your money and Bank card scanning – This is when a fraudster uses you never hear from them again. a card-reading machine or mobile app to scan the details of your contactless bank card without you even Malware – This term is short for malicious software. knowing. Using Near Field Communication (NFC) It is designed specifically to make its way onto your technology, the fraudster only has to be within a few device i.e. your desktop, smartphone, or tablet and inches of where you keep your bank card or credit to manipulate and/or damage them. In addition, card in order to scan your details. Once they have malware can also record and steal your personal your details they can use them to carry out contactless information such as bank account details. There are purchases – you might only know when you see some many different types of malware: viruses, worms, strange purchases on your bank statement. trojans, bots, spyware, adware, and ransomware.
Theft – Stealing a purse or wallet used to be the main Malware gets onto your device in a variety of ways: way of obtaining personal information. Although • On software installed from a website fraudsters now often use the internet for identity theft, many people carry a lot of personal details in their • From a spam email purse or wallet, so this is still a widely used method of getting information in order to steal identities. • Using a flash USB drive already infected with malware Bin raiding – Fraudsters pay people to go through the rubbish that an individual throws out. They are • Clicking on pop-up windows. looking for bank and credit card statements, tax You can protect your computer by installing a firewall details, insurance documents, gas, electricity and to prevent unauthorised access, and antivirus software telephone bills, personal letters and any other pieces of which can prevent, detect and remove malware. personal information that can help to steal an identity.
Changing your address – Thieves divert your post to another location by completing a change of address form. They can then read all your bank statements and other financial information. If they cannot divert your mail, thieves may simply steal it – especially when your post box is separate from your house/flat.
123 SECURITY AND FRAUD IDENTITY THEFT
Social
Phishing – By pretending to be financial institutions ACTIVITY or companies, thieves can send fake emails or pop-up messages to get you to reveal your personal Use the information on the 10 different methods information. You should never click on links in pop-up used to carry out identity theft (physical, digital and windows or in spam/junk e-mail and should avoid social) to draw a two-column table with method of responding to such emails. fraud in column one and how to prevent the fraud in column two. Vishing (voice phishing) or phone scams – These typically involve fraudsters deceiving people In pairs or groups, complete the table by adding into believing they are speaking to a member of bank at least two tactics to stop the intentions of the staff or a representative of another trusted company or fraudsters. The first one has been done for you in agency, such as a government department. Usually, the the example below: fraudster will convince the person that they have been a victim of fraud and will ask for personal and financial METHOD OF TACTICS TO STOP information to gain access to their account. An identity FRAUD THE FRAUD thief could also phone someone to inform them that Bank card Don’t let anyone take they have won a prize, but in order for them to receive skimming your card away to make it they would need to give some personal information; a purchase. this is then used for the thief’s benefit. Always cover your hand Smishing (SMS phishing) – This is when someone when putting your PIN into tries to trick you into giving them your private an ATM to withdraw cash. information via a text or SMS message. Many people Bank card tend to be more inclined to trust a text message than scanning an email and people are less aware of the security risks involved with clicking on links in text messages. A common tactic used by a smisher is to say you must take immediate action – for example, if you don’t click on a link and enter your personal information then you’re going to be charged per day for use of a service. DID YOU KNOW?
Since November 2016, Royal Mail have successfully intercepted and stopped three million scam mail items from reaching UK homes.
Source: Royal Mail
124 SECURITY AND FRAUD KEY TERMS
ACTIVITY
How well do you know your terminology?
Here are seven methods used by fraudsters to get personal information from your computer. Can you match the definition to the key terms below?
1. A piece of code or software program which is 5. Software that is installed on a user’s computer, capable of reproducing itself. Often used to often without their knowledge, and can damage a computer by corrupting the system or monitor activity. destroying or modifying data and files. 6. Software that automatically displays or downloads 2. A type of malware often disguised as legitimate material, such as banners or pop-ups when a software, which is used to gain access to a user is online. The software often tracks and computer in order to watch what the user is doing records users’ personal information and internet without them knowing, steal sensitive data or take browsing habits. over the system remotely. 7. A type of malware that prevents or limits users 3. An application that performs an automated from accessing their system, either by locking the task, used maliciously these can gather passwords, system’s screen or by locking the users’ files unless email addresses and financial information some money is paid. from computers.
4. Acts like a virus but uses a network connection Key Terms: adware, bots, ransomware, to spread itself to multiple computers. spyware, trojan, virus, worm.
CYBER CRIME
It’s not just individuals who are targeted by fraudsters, according to the government’s 2018 Cyber Security Breaches Survey nearly half the businesses in the UK fell victim to cyberattacks or security breaches in 2017. Most businesses rely on digital communications or services and store vast amounts of personal data (e.g. names, email address and bank details) about their staff and customers.
Scammers can hack into customer databases to send fraudulent emails and pretend to be the organisation online or use viruses or malware to corrupt files and systems.
If you are informed that your personal details have been lost or stolen by a company who holds your data, you should change the password of the email account associated with the company straightaway and keep an eye on your bank account for any suspicious activity.
125 SECURITY AND FRAUD FAKE EMAILS
ACTIVITY
Read the three emails below. Do you think any of them might be scams? List anything you think might be suspicious.
Email 1 Email 2
From: Alejandro and Pedro From: [email protected] Lopez Giveaway Team Subject: dear friend
126 SECURITY AND FRAUD ONLINE FRAUD
TIPS FOR SPOTTING ONLINE FRAUD A FAKE EMAIL Lots of people shop online so it’s no surprise that this is a growing area of opportunity for identity theft. • The sender name or email does not look valid. Creating fake websites or selling fake goods online Sometimes the name looks genuine but when are just two of the ways you can be fooled into sharing you check the actual email address it’s something your personal and financial details with fraudsters. completely different. It’s not only fake goods that people can be duped into • Are there spelling, punctuation and grammar buying, potential renters can be tricked into paying an mistakes? upfront fee for a property that doesn’t exist. In these instances, fraudsters will advertise a property online. • Look at how the email begins – is the email The advert will look genuine and often include photos addressed to you or is it a general greeting? and contact details. The advertiser will then ask the • Look at the signature. Lack of details about the potential tenant to pay an upfront fee so that no one sender or how you can contact a company strongly else can rent it, often before they have viewed the suggests a phish. Legitimate businesses always property in person, but in reality the property won’t provide contact details. exist or will have been “rented” to multiple people. Victims then lose the fee that they have paid and • If something looks too good to be true it probably is! won’t be able to rent the property they think they Take another look at the three emails in the last activity. have secured. Is there anything you missed earlier? Reports of rental fraud increase in the summer months, indicating that fraudsters are targeting people looking for holiday rentals, and students searching for accommodation before term starts in September. QUESTIONS?
1. How do you check the full email address from a sender, and what type of things DID YOU KNOW? would make you think the sender could be fake? Cybercrime is any criminal act dealing with 2. Name three methods of social identify theft. computers and networks, including traditional crimes conducted through the internet. Victims 3. What is the difference between digital and of cybercrime lost £28 million between October physical identify theft? 2017 and March 2018.
Source: Action Fraud
127 SECURITY AND FRAUD ONLINE FRAUD
CASE STUDY
Jess wanted to buy a special piece of jewellery with the money she received for her 16th birthday. She found a necklace she liked; it was quite expensive at £170 but she knew the brand and that it was supposed to be high quality.
She thought she would be buying it direct from the maker’s website. It was very professional with no spelling or grammar mistakes and, as the name of the site had UK in it, she assumed they were based in the UK.
However, the fraudsters involved had committed identity theft, stealing the identity of the genuine website.
Jess’s mum placed the order using her credit card and the site said it would take between 7-10 working days for the order to arrive. After about 5 days of waiting, the credit card bill arrived, and Jess’s mum was shocked to see that the necklace seemed to be coming from China.
After three weeks, she rang the credit card company and told them that she had received nothing from the website, not even a confirmation email. They told her to wait 30 days and then they would send a form to fill out that would ensure she’d get her money back. She was incredibly relieved that she paid with a credit card – it is standard practice that purchases over £100 are covered, otherwise they would have lost the £170.
What could Jess and her mum have done to avoid this fraud?
128 SECURITY AND FRAUD HOW TO PROTECT YOURSELF
ACTIVITY
How to protect yourself against online shopping or auction fraud
Read the following tips and then use the words below to fill in the gaps:
1. When making online payments, only pay for items using a secure payment service – look for a URL starting with “https” and a closed ______symbol, or a payment provider such as ______which helps to protect you.
2. Check the website address. A tactic often used by fraudsters is to change the address very ______(e.g. if they’re spoofing an eBay site they may have an address such as “…@ebayz.co.uk” whereas the real site is “…@ebay.co.uk”).
3. When using retail websites, find out exactly who you are dealing with. If it is a ______company, you are in a much better position to sort out the problem if something goes wrong.
4. Browse the website. Take a couple of minutes to double-check the site. Maybe visit the homepage or the “About us” pages and read the text there. Watch out for poor ______, such as spelling and grammar mistakes, or phrases that don’t sound quite right. Any company offering goods or services should list a place of business, as well as a ______or email address through which to contact them. If none of this information is available, you should treat the website as suspicious.
5. Make sure you read the ______on the website or seller. This will give you useful information about recent transactions other buyers have made. Look at reviews across a number of sources, such as Trustpilot, Feefo or Sitejabber, which aggregate customer reviews.
6. Check the item’s ______carefully – ask the seller questions if you’re not sure of something.
7. Be extremely careful when buying things from people with little or no selling ______.
Missing words: description, English, feedback, history, padlock, PayPal, phone number, slightly, UK
DID YOU KNOW?
If you have spent over £100 and up to £30,000 on a credit card and become a victim of identity fraud, the Consumer Credit Act 1974 means you should be able to claim that money back because your credit card issuer is jointly liable with the retailer that you are paying the money to if something goes wrong.
129 SECURITY AND FRAUD HOW TO PROTECT YOURSELF
WHAT HAPPENS IF SOMEONE STEALS YOUR IDENTITY
If fraudsters gain direct access to your bank account or credit cards, they may leave you with no funds to pay for everyday living costs which can cause short term financial stress. The more serious and complex the identity fraud the longer it can take to recover any stolen funds, which can cause more long term financial difficulties. CASE STUDY
Identity fraud can also affect your credit history. If a Dev and his partner Lena have both been victims fraudster uses existing credit that you have (e.g. a credit of identity theft in the last three years. They told card) or applies for new credit in your name this could their neighbours about this, and it turned out leave evidence of debt or missed payments on your that several people who live in the same building credit report. It is possible to correct this information, have also been victims. All their letterboxes are but it can take a while to sort out and to demonstrate on the street outside, so it is easy for thieves to your credit provider that you have been the victim to access their mail, including bills and of crime. Even a temporary drop in your credit score bank statements. may make it harder for you to borrow money – a big problem if you are in the middle of opening a When a thief gets hold of a bill or bank new bank account, buying a car or applying for a statement they then have enough details to be mortgage. Refer back to the ‘Borrowing’ chapter for able to apply for credit accounts (e.g. credit definitions of credit history, credit reference agency, cards or shopping accounts) and then steal the credit report and credit score. cards or account detail.
Although it is certainly possible for a victim to Dev only knew that this had happened to him recoup stolen funds and to clear their name of any when he received a statement showing that he wrongdoing, the emotional toll of identity theft can owed a credit card company over £2,500. He last far longer than any financial worries. Victims can didn’t have an account with this provider, but the blame themselves for their identity being stolen and thief had been able to take one out in his name feel more vulnerable to it happening again. and spend thousands of pounds that he was now being billed for. He had no idea what else they might have done with his personal details; they could have signed up to websites or even applied for a passport.
He contacted the credit card provider who helped him get the money back, but he found the whole experience very worrying.
What could Dev, Lena and their neighbours have done to avoid having their identities stolen?
130 SECURITY AND FRAUD HOW TO PROTECT YOURSELF HOW TO PROTECT YOURSELF FROM IDENTITY THEFT
10 TOP TIPS
1. Never share passwords or PINs with others. 10. Always review your bank account statements (and credit card statements when you get one). You 2. Use strong passwords and PINs – don’t use family should promptly compare receipts with account names; include a mix of upper and lower-case statements, whether it is on paper, mobile or letters, numbers and symbols. Aim for a minimum online. Watch for transactions you don’t recognise, of 8 characters in a password. especially very small amounts – these could be 3. Do not use the same password or PIN for more the sign that someone has your details. than one account.
4. Shred or burn any unwanted financial documents SOCIAL MEDIA – do not put them straight into recycling. PRIVACY SETTINGS
5. Make sure your computer has up to date firewall, Social media use is on the increase in the UK anti-virus and anti-spyware programs. Up to 80% (over 50% of the population are expected to be on of online threats can be removed by doing this. Facebook in the coming years). Users commonly 6. Try to limit the amount of personal information that post their full name, home town and date of birth you carry around on a day-to-day basis. on Facebook and that’s an awful lot of personal information that could be accessed by fraudsters! 7. Limit the amount of personal information that you Facebook allows users to control their privacy settings give away on social networking sites. Remember, to limit who can see what is being posted. Have you your real friends already know where you live checked your settings recently? and when your birthday is! Be alert – think what information about you can be gained by pictures of your first car, new driving licence or when you are holidaying away from home. QUESTIONS? 8. Make use of any security settings offered by social Read the 10 ways to protect yourself from media platforms and mobiles. Examples of these identity theft and answer these questions: include privacy settings, captcha puzzles and warning pages informing you that you are being • Which do you think are the three most redirected offsite. effective ways to protect your information? • Compare your top three to your friends 9. Only accept online friend requests from people or classmates – do you agree or not? who are familiar. • If you had to choose one of these to act on tonight, which one would it be?
131 SECURITY AND FRAUD ONLINE SECURITY
ACTIVITY
Here are the top 10 worst passwords of 2016, as published in SplashData’s “Worst Password List”. In no particular order they are: football, qwerty, password, princess, 1234, 12345, 123456, 1234567, 12345678, 1234567890
Which do you think is the worst? What three rules would you put in place to ensure you had a more secure password?
PASSWORD TOP TIPS! SECURITY QUESTIONS 1. Look again at numbers 1-3 in the “how to protect yourself from identity theft” list. As well as requiring you to enter your password, 2. Do not use the name of your pet, family member, many websites now also ask a security question as school, favourite team, or anything that somebody an extra check to verify your identity, something could easily guess. financial institutions have been doing since the early 20th century. Websites often ask you to choose from a 3. Always log off if you leave your device and anyone standard set of questions, commonly including, “What is around. It only takes a moment for someone to is your mother’s maiden name?”, “What was the name steal or change the password. of the first street you lived on?” or “What was your first pet called?”. When choosing from a given list of 4. Avoid entering passwords on computers you security questions, pick the one which would be most don’t control (like computers at an internet cafe difficult for someone else to find out your answer to. or library) – they may have malware that steals your passwords. Some websites will let you set your own question, in which case make sure you set it as something that a 5. Avoid entering passwords when using unsecured fraudster would not be able to guess or work out from Wi-Fi connections, like at the airport or in a coffee information they know about you already or could shop. Hackers can intercept your passwords and easily find out. data over this unsecured connection. A good security question will have the following 6. Consider using a password manager (sometimes characteristics: called a password safe or vault). This is typically a software application or a hardware device that is • It will be easy for you to remember, even 5-10 years used to store and manage a person’s passwords. from now Typically, all stored passwords are encrypted, requiring the user to create a master password to • It will have thousands of possible answers so can’t access all managed passwords. There are a number be guessed, even by friends or family of password managers available for your use • It’s not a question you would have discussed on – some paid for, some free of charge. social media, so the answer can’t be searched for
7. Be careful not to enter passwords over “open” • Has a simple one or two-word answer Wi-Fi networks. These networks are much more susceptible to hacking attacks. • It never changes.
132 SECURITY AND FRAUD ONLINE SECURITY
WHAT SHOULD YOU DO IF YOUR IDENTITY IS STOLEN?
The first thing to do is ACT FAST if you think you have been a victim of identity theft. Contact your bank or credit card company and alert them to your suspicions. Their contact details can usually be found on the back of your debit/credit card or on any communications you have received from them such BIOMETRIC as monthly statements.
VERIFICATION If you have fallen victim to identity fraud you should contact Action Fraud who will advise you on what to Biometric verification is a way of verifying someone’s do. If you receive some communication which makes identity by recognising one or more distinguishing and you think you have (e.g. mail that seems suspicious unique biological features, including fingerprints, hand or implies you have an account with the sender which geometry, earlobe geometry, retina and iris patterns, you don’t) don’t ignore it. You can also contact Action and voice waves. Fraud for advice if you believe that someone has This technology is still being developed but many stolen your identity. mobile phones and computers now use fingerprints, If you are over 18 you can get a copy of your credit iris patterns, and voice recognition in order to control report, which is one of the first places you can spot if access to the device and specific apps. someone is misusing your personal information, even before you have suffered a financial loss. Review every TWO-FACTOR entry on your credit report and if you see an account or AUTHENTICATION even a credit search from a company that you do not recognise, notify the credit reference agency.
Many websites now add an extra layer of security You may need to contact all the financial organisations in order to confirm the user’s identity. They will ask that you deal with, if the fraudster has reached them for your username and password as normal, but on they may be able to help you get your money back top of that they might text a verification code to your and, if they haven’t been affected, they may be able mobile phone, send an email with a code or web to put security measures in place to stop any fraud or link or, often in the case of online banking, provide theft from any accounts you hold with them. you with a physical security device like a card reader which uses your card details and PIN to randomly If you have information about those who are generate a unique passcode to authorise log in and committing identity crime you can tell the independent certain transactions. charity Crimestoppers, which you can do anonymously.
By asking for two (or more) forms of verification, it makes it harder for fraudsters to gain access to your devices and online accounts, because knowing the password alone is not enough to pass the authentication check.
133 SECURITY AND FRAUD HELP AVAILABLE
HELP AVAILABLE IF YOU ARE A VICTIM OF IDENTITY THEFT
• Your bank or building society – Most now have specialist units that deal with identity theft.
• Citizens Advice – If you feel that your bank or building society are not meeting their obligations to you in relation to the identity theft, you may want to talk to someone at your local branch of Citizens Advice.
• Victim Support – This charity provides help and advice to people who have fallen victim to a wide range of different crimes, including those who have experienced identity theft/identity fraud.
Be aware that you need to exercise the same caution if you are using a Victim Support forum as you would if you were using any other type of internet forum. Although it is sad to say, some fraudsters actually visit these forums as they are aware that the users may be particularly vulnerable or more likely to share their personal information.
DID YOU KNOW?
There are over 100 types of fraud listed on the Action Fraud website.
ACTIVITY
Go to the Action Fraud website and find out about one type of fraud that you don’t already know about. Explain what it is to your friends/classmates.
DISCUSSION
Identity theft is one type of fraud, but there are also many others. A few examples include: charity donation fraud, holiday fraud, lottery fraud, mobile phone fraud and romance fraud. Details of all of these can be found on the Action Fraud website.
Discuss with a partner or in a small group if there are any that could affect you.
134 SECURITY AND FRAUD HELP AVAILABLE
CASE STUDY
Surfed Arts How many people tried to buy tickets?
In 2017, Action Fraud, working with the City of More than 1,500 people tried to buy tickets London Police and in partnership with Get Safe from the fake ticket sales website set up to raise Online and the Society of Ticket Agents and awareness of ticket fraud. Retailers (STAR), set up a fake ticketing website to show just how easy it is to be tricked into buying Why set up the website? fake tickets online. More than 21,000 people have reported falling How the “sale” worked victim to ticket fraud in the last 3 years.
A series of ads were shown on Facebook to More than £17 million has been reported to be lost advertise “Surfed Arts”, the fake ticket sales website. to ticket fraudsters in the last 3 years.
The website was made to look like a secondary Victims are most likely to be men in their twenties. ticket provider, imitating the way fraudsters offer Source: www.actionfraud.police.uk fake tickets online. The Facebook ads targeted people living in areas where bands or artists were due to play sell-out concerts. How can you avoid falling victim to ticket fraud? Adverts were shown to fans of Adele in London, Ed Sheeran in Manchester, Iron Maiden in Birmingham, Coldplay in Cardiff and Bruno Mars in Leeds.
Fans who clicked through were taken to the Surfed Arts website where they were immediately told that they were not able to buy tickets and advised on how to protect themselves from falling victim to real ticket fraudsters in the future.
135 SECURITY AND FRAUD MONEY MULES
MONEY MULES
A money mule is a person who transfers illegally gained money on behalf of others, usually through their bank account. Criminals contact people who are often in need of money through job adverts on social media, just like the one below.
How it works: NEED MONEY • You sign up to a fantastic job Once the criminals have your NOW? opportunity and provide your new bank account details they will keep employer (the criminal) with your encouraging you to transfer more. Earn from the comfort bank account details. More often By this point you will be aware of the of your own home. than not you will not be aware that scam/fraud that is taking place and you are about to be involved in you will probably try to get out of the Make £200 per week illegal activities agreement. This might be difficult as and no experience they can often threaten you. necessary. • Once they have gained your trust, £ the criminal transfers money to your TEXT NOW ON Banks have systems in place to identify bank account 0790150958 £ suspicious movement of money and if you are caught illegally transferring £ • Once the money has cleared your bank account you will be told the criminal funds, it is likely that your bank details of a different bank account to account will be closed and you may transfer the money to find it hard to get credit and/or loans in the future. Worst of all, this can carry a • You will be told how much you can prison sentence of up to 14 years. keep as your “fee”.
ACTIVITY
1. In your opinion, do you believe the advert to be a genuine job advert? If so, why? If not, why not? Explain your answer. 2. If you thought that the advert wasn’t genuine, who would you inform about your concerns? 3. Using all of your knowledge of security and fraud, design a factsheet for young people about how they can identify and avoid money mule schemes.
DID YOU KNOW?
Almost 9,000 young people in the UK aged between 18 and 24 were caught acting as money mules in 2017.
Source: NatWest Moneysense
136 SECURITY AND FRAUD WHAT HAVE YOU LEARNT?
WHAT HAVE YOU LEARNT?
Using the knowledge you have learnt from the previous pages in this chapter, complete the activity and case study below:
ACTIVITY
Write a blog post aimed at alerting young people to identity theft and/or fraud.
To help you to complete this task look at the following short videos which can be found on YouTube: • Data to Go (Cifas) • The Devil’s in Your Details phone (Action Fraud) • The Devil’s in Your Details online (Action Fraud) • Digital Safety TV ads (Barclays) If you are unsure where to begin, type “How to write a blog post” in your search engine – you will find plenty of advice on the internet.
CASE STUDY
Noah receives the following text: In a panic, Noah clicks through using the link provided and immediately enters his customer number and PIN. Within seconds he receives another message…
Thankyou for your details. We will cll you shortly The Fraud Team WEBANK4U_FRAUDDEPT Still thinking about it, he looks again at the messages and starts to Customer, please contact us immediately wonder if they are genuine. He checks his online banking app and, to using the link below. his horror, he realises that all of his savings have gone. We have reason to bel you’re account has been 1. What method of identify fraud is this? accessed without your 2. Looking back at the text, Noah has spotted a number of concerns. consent. Identify three details that indicate that the text is not genuine. The Fraud Team 3. How could Noah have protected himself against this identity fraud? www.webank4u/ frauddept.com 4. List five things Noah should do now.
137 SECURITY AND FRAUD FURTHER YOUR KNOWLEDGE FURTHER YOUR KNOWLEDGE
PERSONAL DATA
In 2017 Ofcom asked 1,800 adults how confident they were about knowing how to manage access to their personal data online. By this, Ofcom meant whether these adults knew how to stop companies from getting access to their personal details, for example, their date of birth, address, phone number, etc. The chart below shows the answers that were given as percentages.
ery confident Fairly confident Neither/Don’t know Not very confident Not at all confident
All internet users - - - -
- -
Source: www.ofcom.org.uk
1. What percentage of all internet users were either very or fairly confident about managing their data online?
2. a) Which age groups were more confident than this?
b) Why do you think this is?
3. a) Which age group was the least confident about managing their data online?
b) Is this the response that you would have expected? Explain your answer.
138 SECURITY AND FRAUD FURTHER YOUR KNOWLEDGE
4. Ofcom have provided you with the raw data, showing the actual number of males and females who responded to this question. Calculate these as percentages and draw a bar chart representing this information like the one to the left.
VERY FAIRLY NEITHER/ NOT VERY NOT AT ALL TOTAL CONFIDENT CONFIDENT DON’T KNOW CONFIDENT CONFIDENT
Males 900 392 288 80 80 60
Females 900 333 288 99 99 81
5. Finally, write a paragraph summarising the key outcomes of this data. CHECKS MADE
The infographic below shows the checks people make when purchasing online before entering financial information.
If the site looks secure If I’m familiar with If there is a link to another padlock symbol or https) the company or brand reputable service like Paypal
If there is a guarantee If the site is recommended my details won’t be shared by friends/family with anyone else
Mentioned at least one of the five above
If the site is listed by a search If it’s the only way to get the I enter my details whenever engine such as Google or Bing service or product I want they are required
Mentioned at least one of the three above
Don’t know Source: www.ofcom.org.uk
6. In pairs, write a summary explaining the key points of this data. In your opinion, is there anything about the data that you were surprised about?
139 SECURITY AND FRAUD FURTHER YOUR KNOWLEDGE
GENERAL DATA PROTECTION REGULATION (GDPR)
The General Data Protection Regulation (GDPR) came into force in May 2018 and is used to protect consumer data and ensure data is securely stored, making businesses think about the data that they collect, why they need it and how they use it. All UK organisations, as well as EU or worldwide companies that hold UK customer data, must follow these regulations. The key points of GDPR are:
• All customers must give their consent to using their • All customers have the right to ask organisations personal data to delete their personal data and stop it from • All customers have the right to obtain confirmation of being distributed whether their personal data is being used and how • All customers are entitled to receive an electronic report for free about the data that is kept by a business.
Carry out some research into GDPR and test your knowledge below: 1. GDPR is designed to protect and control the use 4. If there is a breach in the security of your data, of your personal data, but what personal data what does the company affected have to do? does this cover? a) Nothing, they don’t have to do anything a) Just my name, address and date of birth b) Call the police b) The above plus medical records, social network c) Inform the authorities within 72 hours of data and bank details it happening c) Anything that you believe is “personal data” 5. Once a business has your personal information, to you how can they use it? 2. You decide to quit a social media app, what must a) Whichever way they want the social media company do? b) They can sell it to other companies a) They must tell you how you can order them to c) They can only use it in the way that was delete all of the personal data that they hold explained to you before you gave them about you consent to use it b) They are under no obligation to delete any of your data c) They ask you to complete an online questionnaire about why you want to leave 3. You have a fall at work and when you get to hospital you are unconscious and require an operation. What is your GP allowed to disclose about your medical history? a) Only information about previous medical conditions b) Nothing until you gain consciousness c) Anything that will help save your life
140 YOUR MONEY MATTERS GLOSSARY YOUR MONEY MATTERS GLOSSARY
ATM (Automated Teller Machine) Bank Also known as a “cash machine” or “hole in A financial institution owned by its Aa the wall”, this is an electronic machine that shareholders. It aims to maximise profits dispenses cash and other banking services for the shareholders through its financial Account using a cash withdrawal card and a PIN activities. It must lend money in order to Arrangement with a bank or building society (Personal Identification Number). stimulate economic growth, and, in turn, to hold your money in an account and to profit. To lend money, a bank must take a take it out when you need it. Automatic enrolment certain amount of deposits, which it does in the form of current and savings accounts All workers between the age of 22 and opened by individuals and businesses. Advertising Standards Authority (ASA) retirement are automatically enrolled in a workplace pension. The UK’s independent regulator of Bank account advertising across all media. A service from a bank or building society which lets you pay in money, get cash out Annual Equivalent Rate (AER) and pay bills, etc. The bank keeps a record Takes into account the charges and the Bb of all transactions. interest paid on savings and shows it as an overall percentage rate. Used as a way of BACS (Bankers Automated Clearing Bank loan comparing different savings products; the System) higher the AER, the better the return on your Money that you borrow from your bank savings. A fast service that allows transfers of money and then pay back with a pre-arranged to be made electronically from one bank to interest rate. another (e.g. salaries). Alternative credit Bank of England Credit arrangements outside the Bad debt mainstream, which usually end up being The UK’s central bank responsible for setting extremely costly. Debt that does not provide ongoing benefit the base interest rate in order to try and or a financial return to the borrower. keep the economy stable. This base rate can influence the rates offered to savers and Annually Balance borrowers for some financial products. Something that is done every year. The amount of money you have in your account at any particular time or that you Bank statement Annual Percentage Rate (APR) owe on your credit or store card, or on a A piece of paper or online document that The total cost of a loan, taking into account purchase after the deposit has been paid. It shows all the money that has been paid into the interest you pay, any other charges and will be shown on your statement. an account and paid out from an account. when the payments are due. Used as a way Statements are usually sent each month. of comparing different borrowing products; Balance transfer the higher the APR, the more expensive Banking apps the loan. Allows you to take out a new card to pay off debt on old credit and store cards that are Many UK banks have apps that allow you charging interest. The new card may have to manage your accounts with them, and Apprenticeship 0% interest or have a lower interest rate than transfer money to people or businesses. An apprenticeship combines practical training you are currently paying, so you will become in a paid job with study. debt free quicker as the payments you make Bankruptcy reduce the debt, rather than paying off the A court order given when someone cannot Asset interest. pay the debts they owe. An official receiver Something a person owns that has a takes control of your money and property, monetary value (e.g. property, investments, and deals with creditors. cash). Bank card skimming The act of “skimming” or copying your debit or credit card information when you make a purchase.
141 YOUR MONEY MATTERS GLOSSARY
Bank card scanning Budgeting Catalogue Use of a card-reading machine or mobile The process of managing your money and A printed magazine/book that showcases app to perform fraud by scanning the details the balance between your income and goods for sale. You can buy them on credit of your contactless bank card without your outgoings. and pay in weekly or monthly instalments, you knowing. usually with added interest payments. The Building society goods will usually be delivered by post. Base rate An organisation that is owned by its Interest rate set by the Bank of England, members, some or whom will be customers Charges which other financial institutions (such as saving or borrowing from the society. They Fees and interest that you have to pay, for banks) use for guidance when setting often offer a range of financial services example, when you borrow money or buy their rates. and are similar to banks. on credit.
Basic Rate Tax Buildings insurance Cheque The basic rate of Income Tax is 20%. Most Type of insurance policy that pays out if Paper-based payment method used for tax payers will pay 20% tax on any income the structure of your home is damaged buying goods, paying bills and given as gifts. above the personal allowance. (e.g. your house is damaged by fire). Collective investments Benefits Bursary A form of investing where an investors A government system that provides financial Cash award given to a student by a college money is pooled into a much larger fund support to people who are eligible for it or university towards the cost of their studies. and managed by a fund manager to invest (e.g. state pension, universal credit). in a range of assets. This aims to spread the Business expenses risk associated with investing. Bill The costs incurred when you run a Statement that shows how much money business (e.g. utilities, company vehicles, Commission is owed for something (e.g. gas, electricity, office equipment). A payment based on the value of sales phone). made. Sometimes this will be in addition to Business income a basic salary. Bin raiding Money a business earns from its customers When thieves search through household by selling products and services. Commodities rubbish looking for personal information Something that can be traded, bought, that can be used to carry out fraud. Business rates or sold. Rates charged by local councils on most Biometric payments non-domestic properties (e.g. shops, Compound interest Payments for goods made using finger offices, restaurants). The usual type of interest paid on savings scanning technology or facial recognition and loans, based on the principal plus the systems. interest already paid so far (i.e. interest on interest), so the savings or the loan will grow Biometric verification by increasing amounts (unless money is Cc taken out or the loan paid off). A way of verifying someone’s identity by recognising one or more distinguishing and unique biological features. Capital Consumer The amount of money you originally have, Someone who buys something. Bonds save or invest, before any interest or other return or loss is taken into account. It could A fixed income investment where an investor Consumer Credit Act 2006 also be an amount of money that you loans money to government or public This act gives protection to consumers when have borrowed. company at a fixed rate of interest for they are borrowing money. a specified period of time. Capital Gains Tax Consumer rights The tax paid on profits from selling Bonus Consumer rights protect you when you investments such as shares if their value is Payment made to an employee in addition buy goods and services. These are rights over a certain amount. to their basic salary, often for working hard by law (including the Consumer Rights Act or hitting targets. 2015), which a shop or service provider Cash ISA can’t change. Borrowing A long-term tax free savings account. Getting money from somewhere that you Consumer society intend to pay back. You might borrow A society in which people place a high informally from friends and family or take value on possessions and in which they are out a formal loan, with a written agreement, encouraged to buy more. from a bank or building society.
142 YOUR MONEY MATTERS GLOSSARY
Contactless payment Credit reference agency A way of making a payment by tapping or An agency that holds information on adults. waving your contactless device (e.g. credit This information includes public records Dd card, debit card, smartphone) on or near (e.g. electoral register entries) and credit a contactless reader. history information. They make this Debit information available to lenders when Money taken out of an account is “debited” Corporation tax you apply for credit, who then use the from that account. information to decide whether or not to A tax on profits and capital gains made offer you credit. by companies, calculated before dividends Debit card are paid. Credit report A small plastic card used to buy things in a shop or online without using cash or a Council tax A detailed report of an individual’s credit cheque. When you make a payment or history, current credit arrangements, address Tax paid to the local council for local withdraw cash with your debit card, the history and details of anyone you are services such as libraries, police, waste money is taken straight out of your account financially linked with. collection, etc. electronically, if you have the money available to spend. You cannot borrow Credit score Credit money on a debit card. A score given by a credit agency based on An account “in credit” means that there is your credit history, personal and financial Debt money in it that is available to be spent. If circumstances. It reflects the level of risk in you obtain goods or services “on credit” it Money you owe to another person lending to you and the likelihood of you means that someone (for example, a bank or organisation. paying credit back and helps them to decide or credit institution) has given you the money whether you are likely to repay the loan you as a loan to make the purchase. Deductions are asking for. Amounts taken from your gross pay Creditor Credit union directly by your employer (e.g. Income Tax, An individual or company that is National Insurance contributions, pension A community-focused, non-profit-making owed money. contributions, student loan). organisation that encourages saving and lends money to members at low interest Default Credit cards rates. To use a credit union you have to A small plastic card available to 18 year become a member. To default on a loan means to fail to make olds and older from most banks, which payments that are due. allows you to borrow money up to a certain Cryptocurrency limit. When you buy something with your Degree Virtual or digital currency produced by credit card, the amount you spend is added a public network, rather than any A higher education qualification. to your total borrowing. Every month you government, that uses cryptography to make are sent a statement to show how much you sure payments are sent and received safely. Delayed gratification have borrowed and how much you need to It can be used to buy products and services repay. If you don’t repay the full amount, Postponing the sense of enjoyment from but is generally not accepted in shops. you will start paying interest. immediate spending to sometime further into the future. Currency Credit history Money in any form used to buy goods and Deposit A record of loans you have taken out or services e.g. euro, pound, dollar. Different credit card payments made or missed. This Money paid into an account. Can also mean countries use different currencies. information is stored by credit reference an initial payment that secures the purchase agencies, which supply details of your credit of something, normally a percentage of the score/rating to financial institutions when Current account total amount. you take out further loans. An account which helps you to manage your day-to-day money – pay bills, receive Digital footprint Credit limit incoming money and keep money secure. Information about a person that exists on The maximum amount the store card or the internet as a result of their online activity. credit company will lend you at any time. Cybercrime Any criminal act committed through the Digital wallet Credit rating internet using computers and networks. An app that allows you to store all your An estimate of how risky it would be to lend credit, debit and customer loyalty card a person or an organisation money based Cyber security details on your phone. on their credit history/record. Technology, processes and controls that are designed to protect systems, networks and data from cybercrime.
143 YOUR MONEY MATTERS GLOSSARY
Direct debit Excess Financial risk An instruction to your bank to release money Some insurance policies require you to To gain financial rewards, there is often from your account to pay bills and other pay an agreed amount of the cost of any some element of risk involved – the outcome amounts automatically. The billing company damage if you make a claim. The insurer of a financial decision may not be certain has control and requests the money from will then pay for anything more than this. or guaranteed. the bank directly, and can change the amount requested. Exchange rate Financial Services Compensation The exchange rate tells you how much you Scheme (FSCS) Discount get when exchanging one currency for The scheme that protects your money should Money which is taken off the price of another (e.g. 1 British pound might be worth anything happen to your registered bank, something. You may need to collect coupons 1.5 US dollars). building society or credit union. or vouchers before claiming the discount. Sometimes shops and businesses give a Excise duties Financial situation discount to their employees. A type of tax charged on goods produced Your financial situation refers to how much within the country. money you receive in wages and/or benefits Disposable income and how much money you have saved up. It The amount of money left at the end of each Expenditure also includes how much money you owe and month once all your bills have been paid. any financial arrangements you have made The amount of money you spend on goods for the future, such as a pension. Sometimes or services. Dividend people will also ask you about your regular outgoings, such as the amount you pay Money from a company’s profits paid to Expenses in rent. people who have shares in the company. Things you need to spend money on in order to live (e.g. rent, bills, food). Fixed interest rate An interest rate guaranteed to stay the same for an agreed period, regardless of whether Ee Ff the lender changes their rates. Early repayment charge Fixed rate savings account A penalty or fee for repaying a loan before Fair trade Your saved money is “locked away” for a the end of the term. The fair-trade movement aims to make sure specified period of time. that workers and producers get paid fairly. Easy access account Fraud An account that allows you to withdraw Fee When a person dishonestly and deliberately money at any time without prior warning. A sum of money you pay, for example, to deceives a victim for personal gain of have a loan or credit arranged for you. Or a property or money. Economy one-off payment that is paid or charged for The state of a country or region in terms a professional service. Fraudster of its production and sale of goods and A person who commits fraud. services, and the way its government Financial adviser manages its money. A person or company who can assess your Full time financial needs and give you advice about Usually working 35 hours or more a week, Electronic transfer money and suitable financial products. Some full-time workers are usually provided with a A way of moving money from your account advisers can also manage investments for contract of employment and receive benefits to another. you. An independent financial adviser (IFA) is such as holiday pay, sick pay and pension one that doesn’t work for a specific bank or opportunities. Employee other seller of financial products, and can, in theory, offer a wider range of options. Someone who is paid to work for an organisation, company or an individual. Financial Conduct Authority (FCA) Gg Employer The independent body that regulates the financial services industry. Organisation, company or individual who Gambling pays someone else to work for them. Financial exclusion Betting money, which can result in either a win or a loss – for example, through playing Lack of access to mainstream banking and Estimate the lottery, fruit machines or casino games. other financial services. An educated guess. Gambling Commission Financial Ombudsman Service (FOS) Set up under the Gambling Act 2005 Set up by parliament to resolve individual to regulate commercial gambling in complaints between financial businesses and Great Britain. their customers.
144 YOUR MONEY MATTERS GLOSSARY
General Data Protection Regulation High cost credit Income tax (GDPR) Forms of borrowing which attract excessively A tax payable on almost all types of income, Regulations in force to protect consumer high interest rates e.g. payday loans, at various rates depending on the level data and ensure data is securely stored; unarranged overdrafts, and can even be of income. making businesses think about the data they illegal and unregulated e.g. borrowing from collect, why they need it and how they use it. loan sharks. Independent Betting Adjudication Service (IBAS). Gig economy Higher Tax Rate Founded in 1998, IBAS is a third-party A term used to describe the growing trend The higher rate of Income Tax is 40%. organisation that settles disputes between towards short-term contracts compared to registered gambling establishments and their permanent employment. Hire purchase (HP) customers in the UK. A way of paying for goods if you don’t Good debt have all the money up front (often used Inflation Debt that provides an ongoing benefit to for cars). An initial deposit is usually paid, A continual increase in the general level of the borrower or will result in some kind of followed by a series of regular payments to prices. This means that over time a given financial return. cover the balance and any interest over a amount of money will buy fewer goods fixed amount of time, the same as repaying and services. Graduate training scheme a loan. You would not own the car until you have completed the hire purchase A work-based training programme that Inheritance agreement. allows recent graduates to gain practical The passing on of money or assets when experience with a company. someone dies. It can also include gifts given Home buildings insurance while the person is still alive. Grant Insurance which covers the cost of repairs to the structure of your home in case Cash award usually given for a very Instalments of damage. specific purpose, like studying abroad or Weekly or monthly repayments made to pay undertaking a research project. off a loan or goods bought on credit. Home contents insurance Gross Insurance which covers your possessions in Instant access account the home against loss or damage. A total amount of money before any A savings account where you can get your deductions, such as tax or National money back without having to give any Insurance. Hourly rate notice. They generally attract lower rates Being paid a set amount for every hour of interest than accounts where notice Gross income/pay you work. is required. The total income you receive before anything is taken away from it such as Income Tax HM Revenue and Customs (HMRC) Insurance and National Insurance contributions. Gross The government department responsible for A way to protect yourself against the pay will always be bigger than net pay. tax collection and benefit payments. financial loss of something going wrong. Insurance provides a guarantee of Gross interest compensation for specified loss, damage, illness, or death, in return for payment of a Interest on savings before any tax is specified premium. taken off. Ii Insurance premiums Identity theft Money you pay to the insurance company, This is a type of fraud and is the act of a either annually or monthly, for the insurance. Hh person illegally obtaining information about someone else often for financial gain. Insurance policy Hacking A contract from an insurance company When criminals successfully guess or Income telling you what you are covered for, and decipher passwords, security questions, and/ Money that comes to you through earnings, how much money the company is prepared or PINs (Personal Identification Numbers). gifts, selling things you own, from your to pay out. parents, etc. Health insurance Interest Insurance which covers medical expenses Income protection The reward you get for keeping your money if you are ill. It may also provide a regular A type of insurance that guarantees you with a bank or a building society. It is also income to you if you are too ill to work. some income if for any reason you are the cost you pay when you borrow money unable to work. through a loan or credit agreement.
Interest rate This is the percentage that is paid on savings or charged on loans.
145 YOUR MONEY MATTERS GLOSSARY
Invest Loan shark Motor insurance (third party) To use money to buy something that may Someone who lends money without being Legally required insurance which will cover increase in value over time, for example, regulated to do so. As they are not regulated your costs if you damage someone else or jewellery, property or shares in a company. there is no limit to the interest rate they their property (i.e. a third party). charge or the penalties they can apply. Investment Motor insurance (third party, fire Products that have the potential to grow in London Stock Exchange and theft) value, but they can also decrease in value, The main stock exchange of the UK where Insurance which also covers the meaning you begin to lose money. shares, bonds, etc. are sold. policyholder’s own vehicle if it is stolen or catches fire. ISA (Individual Savings Account) Lottery An account where you don’t pay tax on A form of gambling that involves the Motor insurance (fully comprehensive) interest earned. There is a set limit of how drawing of numbers for a prize (e.g. the Insurance which covers the cost of damage much you can save in an ISA each tax year. National Lottery). to yourself and your own vehicle, as well as any damage you may cause to someone else Lump sum or their property. Jj A one-off payment.
Junior ISA Nn A long-term, tax-free savings account for Mm children under 18, contributed to by the UK National budget government, which becomes a normal Manageable debt The annual budget for the UK set by HM ISA when they turn 18. Treasury. Debt taken on that the borrower can afford to repay. National Insurance contributions Maintenance loans A government deduction from your wages used to pay for benefits that you might need Ll A loan to cover your day-to-day living to claim, and your state pension when you costs, like accommodation, food, transport, retire. A plastic card with your NI code is phone and laptop costs when at university. Life expectancy sent to all UK residents just before their 16th The maximum you can borrow depends on The average period that a person may birthdays. Employers and employees both how much your parents/guardians earn. expect to live. pay contributions. Maintenance loans are paid directly to you at the start of each term, and not paid back Life insurance until you have finished the course and are National Minimum Wage An insurance that pays money on your earning above a certain amount. The minimum pay per hour that most death, or in some cases if you become workers under the age of 25 are entitled to critically ill while you are covered. Life Malware by law. The rate will depend on a worker’s insurance is often taken out to cover a age and if they are an apprentice. Short for malicious software, designed mortgage, so that if you die during the specifically to make its way onto your device mortgage term the loan will be paid off. i.e. your desktop, smartphone, or tablet and National Living Wage to manipulate and/or damage it. The minimum pay per hour most workers Lifetime ISA aged 25 and over are entitled to by law. A long-term, tax-free savings account, Minimum repayment contributed to by the UK government, that is The minimum amount you must pay off each Needs often used for first-time property buyers or to month on the debt you have on credit or These are the absolute necessities; the things build savings for when you retire. store card payments. you really cannot do without. Loan Money mule Net A sum of money that you borrow from a A person who transfers illegally gained Indicates a sum of money from which certain person or organisation, usually with interest. money on behalf of others, usually through deductions have already been taken away their bank account. (e.g. tax). Loan cover Insurance that will protect you if you Mortgage Net income/pay cannot repay a loan due to illness, A type of secured long-term loan used to Your net income/pay is the total you earn in a unemployment, etc. buy a property. If you do not keep up the week, month or year after any deductions have mortgage repayments the mortgage provider been made. Sometimes called take-home pay. (often a bank) can repossess your property.
146 YOUR MONEY MATTERS GLOSSARY
Notice accounts Password Pet insurance An account where advance warning usually A word or phrase only you know that Insurance that will cover vet fees if has to be given if you wish to withdraw is used to prove your identity to access your pet needs an operation or other money from it without being penalised. online accounts. medical treatment.
PAYE (Pay As You Earn) Phishing When deductions are collected from an A method used by fraudsters to try and Oo employer before the individual is paid their gather personal information using deceptive salary/wages. emails and websites. Occupation Payday lender PIN (Personal Identification Number) Your job, work or profession (e.g. bricklayer, Lenders who provide very short-term loans A four-digit security number used with cash checkout operator, teacher). on relatively small amounts of money. machine, credit cards and debit cards. It is like an electronic signature that stops anyone Outgoings Payments else using your account. Your expenditure (e.g. rent/mortgage, bill Money you pay out, for example, on your payments, savings). rent or mortgage, on materials you need for Piecework your business, interest on loans, money for Payment for each item produced. The more Overdraft (arranged) utilities such as gas and electricity. items produced the more pay received. A way of borrowing money through your current account. Arranged overdrafts are set PayPal Policyholder in advance and you can spend money up to An electronic payments system that allows The person (or people) named on an the agreed overdraft amount. you to make secure payments to an insurance policy. individual or to purchase items online. Overdraft (unarranged) Portfolio If you go overdrawn without asking the bank Pension A range of investments held by a person in advance or have an arranged overdraft An income paid regularly by the government or organisation. and spend more than the amount agreed, or a private company to a person who this is an unarranged overdraft. This is likely does not work anymore because they have to incur penalties and can be very costly. Premium bond reached retirement age. A form of savings account offered by the Overtime government-backed savings bank – National Pension contribution Savings and Investments (NS&I). Time worked in addition to normal or The amounts you and your employer pay contracted working hours. Can be paid into your pension, usually calculated as a or unpaid. Price comparison websites percentage of your basic salary and taken Websites that have been developed from your gross pay. specifically to compare the prices of goods from a range of suppliers and retailers. Pension scheme Pp A type of savings plan to help you save Principal money for later life, unlike normal savings The original amount of savings deposited, you cannot use your money until you reach P45 or debt taken out. A document that an employer has to provide retirement age. when you leave a job so that the right Private sector amount of tax can be deducted from your Personal details The part of a country’s economy that is earnings. Information about an individual that can be controlled by private individuals, businesses used to identify them (e.g. name, date of or groups. P60 birth, address). A summary of your pay and the tax that’s Profit been deducted in the tax year. Your employer Personal loan The amount of money left after all costs and should give you a P60 to keep as a record at When money is borrowed for a non- expenses have been deducted from income. the end of every tax year. specified purpose and generally paid back in monthly instalments. Part time Public sector Working fewer hours than full time but Personal Savings Allowance The part of a country’s economy that is controlled or supported financially by receiving the same treatment and benefits The amount of interest that can be earned the government. (though these may be proportionate to the on savings before tax has to be paid on it. number of hours worked per week). Personal Tax Allowance The amount of income you don’t have to pay tax on.
147 YOUR MONEY MATTERS GLOSSARY
Shareholders People who invest money in a company by Rr Ss buying shares in it, hence owning part of it.
Regular saver account Salary Shares A regular sum of money must be added to An amount of money paid to an employee A unit of ownership in a company. the account each month. for a job, usually paid directly into his or her bank account every month. Sharia banking Rent A way of banking following Islamic laws Money paid to the owner of the property Saving about money; for example, profit and loss where you are living. The act of putting money aside for future is to be shared, interest is not given or use. Saving can also mean reducing the taken etc. Rental fraud amount you spend. Short-term contract A type of fraud where potential tenants This can be on a full or part-time basis but are tricked into paying an upfront fee to Savings is only for a fixed period of time. rent a property which either does not exist, The amount or value of the money you put has already been rented out, or has been aside for future use. Shift payment rented to multiple victims at the same time. Savings accounts When you are paid for working unusual Repayment mortgage hours, for example, working during the Accounts specifically designed for you night, in addition to normal pay. A repayment mortgage is a property loan, to save money in, usually best for saving where regular payments pay off both the larger amounts. Simple interest interest and a proportion of the original A quick and easy method of calculating loan. Scholarship the amount of interest payable between any Cash award given to a student who does two dates. Repayments particularly well in their exams preceding The sums of money you pay back weekly university or college. The scholarship may be Small print or monthly on your loan or credit. awarded by the university or a company and may pay the tuition fees for a course in full A product’s terms and conditions, typically written in small letters and should be Repossession or in part. read carefully. When a mortgage lender takes back Second hand ownership of a property when a borrower is Smishing (SMS phishing) unable to afford their mortgage repayments. Items which are not new and have been owned by someone else. A type of fraud where someone tries to trick you into giving them personal or financial Retirement Secured loan information via a text or SMS message. The period in a person’s life when they stop A secured loan requires something that gives working and start receiving a pension. Those Stamp Duty Reserve Tax with a private pension may be able to retire the lender security in case you cannot pay A tax applied when you buy shares. earlier if their pension fund is large enough. the loan back.
Standard of living Return Security question An extra level of security used to verify your The quality of life enjoyed by an individual The amount you get back when you invest identity when accessing online accounts, only or household. money. you should know the answer to the question. Standing order Rights Self-assessment A method of paying regular amounts from The protection that is given to you by law; for The way in which self-employed people your bank account automatically. You are example, you have a right to compensation calculate and pay their Income Tax. in control and instruct your bank to pay the if your bank goes bust and you lose money. money to a particular person or company. Self-employed It’s your responsibility to change the payment Risk A person is self-employed if they run (e.g. the date or amount) if it needs to Another name for chance or uncertainty e.g. a business for themselves and take be changed. the risk that you may become unemployed, responsibility for its successes and failures. or the risk that you do not have savings. Statement Self-insuring A document from the bank or building Not taking out an insurance policy but society that shows all your recent payments having enough money saved, or saving an into, and withdrawals from, your account. amount each month, which will be used to You should check it with your own records. cover the loss of income or property if you lose your job or covers the cost of replacing something you own if it breaks or is stolen.
148 YOUR MONEY MATTERS GLOSSARY
State pension Taxable income A pension paid by the government and to The amount of income used to calculate how qualify for it you must have paid National much tax an individual or a company owes Uu Insurance contributions for a certain number to the government in a given tax year. of years. UK Voluntary Living Wage Rate Term Set by the Living Wage Foundation campaign Stocks and Shares ISA The time for which something lasts (e.g. group, this is independently calculated and Investing in a range of shares, bonds and how long you have to pay back a loan). designed to reflect the “real cost of living in funds without paying tax on the dividends the UK and London”. It tends to be higher paid out. Terms and Conditions (T&Cs) than the National Living Wage but is not enforceable by law. Often called “the small print” and are the set Store cards of rules surrounding a financial product. Unit price Store cards are like credit cards but are available from shops rather than banks. They Total deductions The price for one item or measurement, such as a pound, kilogram, or pint, which can can only be used to buy things at particular The total amount that will be taken from your be used to compare the same type of goods shops. Anything you spend on your store card gross pay and will be shown on your payslip. sold in varying weights and amounts. is borrowed money. If you do not pay off the What’s left after this is your take-home pay. full amount each month you will start paying interest on it. Tracker mortgage Universal Credit This tracks or moves in line with a declared A payment to help with living costs which Student Loans Company (SLC) interest rate (usually the Bank of England you might be able to get it if you’re on a low Non-profit making government-owned base rate). income or out of work. organisation that provides loans and grants to students in universities and colleges in Transaction Unmanageable debt the UK. Any payment in or out of a bank account. Debt that is taken on with no means to repay it. Travel insurance Unsecured loan Insurance which covers loss of luggage, Tt travel cancellations or disruptions, or if you An unsecured loan does not involve security have to pay medical expenses because you for the lender, but as they are taking a Take-home pay fall ill on holiday, etc. greater risk the APR (Annual Percentage Rate) tends to be higher. Your actual monthly salary after deductions such as Income Tax and National Insurance Tuition fees Utilities contributions (i.e. net pay). The amount charged by universities to students to pay for the cost of the course. Services such as gas, electricity and water. Tax Utility bills A fee charged by a government on a Tuition fee loan product (VAT), income (Income Tax), or A loan which covers the full cost of your Bills with charges for electricity, water, gas activity (road tax) to finance government university course. This is paid directly to the and telephone. expenditure on public goods and services, course provider, and not paid back until you such as the police, the NHS, street lighting have finished the course and are earning University above a certain amount. or street cleaning. A higher education institution where students study for degrees and academic Tax allowance Two-factor authentication research is done. The amount of money you can earn before An extra layer of security in order to confirm paying income tax. your identity to access online accounts. On top of a password and security question, this Tax code could be texting a verification code to your mobile phone or sending an email with a Vv Shows how much income you can earn code or web link. before you start to pay Income Tax – your VAT (Value Added Tax) tax allowance. It is the first four numbers of your tax allowance followed by a letter. A tax paid by the consumer for goods and services. Tax year Variable rate interest A 12-month period running from 6th April one year to 5th April the next year. Taxes, When the interest rate you are charged is not such as Income Tax, are worked out over fixed, so interest payments may change if the this period. lender changes their rate.
149 YOUR MONEY MATTERS GLOSSARY
Vishing (voice phishing) A type of fraud where someone tries to trick you into giving them personal or financial information over the phone. Ww
Wages The amount you are paid on a weekly or monthly basis.
Wants These are the items, services or experiences you would like to buy if you had the money to do so.
Withdrawal Money taken out of your account.
Workplace pensions These are set up by your employer, and a percentage of your income will be paid into the pension. This is taken off your gross income before it is taxed so your pension contribution is tax free. Zz
Zero hours contracts Casual contracts that offer no guarantee of any work.
150
YOUNG MONEY
formerly pfeg
DID YOU KNOW?
If you borrow Almost
£3,000 50% YOUR MONEY MATTERS on your credit card and only made of jobs existing today will be the minimum repayments, you’ll completely redundant by 2025. be almost 50 before it clears.
Real Madrid Football Almost Club insured Cristiano Ronaldo’s legs for 9,000 young people in the UK aged £90 million between 18 and 24 were caught acting as money mules in 2017.
Your Money Matters has been created by Young Money y-m.org.uk (formely pfeg) to help give you the knowledge, skills and attitudes you need to make informed decisions about managing your money. By exploring themes around the questions above and key topics such as saving, borrowing y-m.org.uk and the world of work, Your Money Matters will help you become financially capable so you can manage your ISBN 978-1-9164672-1-7 money successfully and achieve your future goals. YMM-TXTBK